Last Updated on November 26, 2024 by admin
In a company setup, the management is headed by top executives such as the board of directors who are appointed by shareholders. The top directors include both executive and non-executive directors, and understanding the difference between executive and non-executive director is crucial, as non-executive directors are not in charge of the company’s daily operations.
Non-executive directors are expected to remain unbiased and promote the interests of the corporation. An executive director has much information concerning the company, whereas a non-executive director is expected to know something broader. The present article is aimed at delineating the concepts of executive and non-executive directors, discussing their dissimilarities and similarities, and the roles each performs in a certain organisation.
Who is an executive director?
An executive director is someone who has been hired by the company. An executive director is an employee of the company and also a board member.
The company’s whole-time directors, known as executive directors, report to the Chairman. They are senior employees involved in policy matters and key strategic functional areas.
The Nomination Committee or the company’s board itself elects them to the board. Their responsibility within the company is to devise and execute strategies that are both cost-efficient and time-efficient.
What are the roles and responsibilities of an executive director?
They are actively involved in the day-to-day management of the company. They are actively engaged in overseeing the day-to-day operations of the company, making key operational choices, and ensuring the efficient functioning of the business.
The company’s budget also falls under the responsibility of an executive director, who must ensure its compliance with relevant regulations and proper allocation of resources. Running a business involves various financial aspects, many of which are handled by accountants and finance professionals, but the executive director is responsible for overseeing them from a broader perspective.
They are also in charge of maintaining positive relationships with stakeholders, including founders, investors, partners, and clients or customers. They often serve as the public face of the organisation. They are accountable for keeping stakeholders’ content, informed, and assured about the business’s progress.
As the executive director of an organisation, one has the responsibility of supervising the employees and administering all the materials that the employees need to work well. The responsibilities are different from those of an HR personnel but are still based on human capital management.
In many instances, when the problem rises beyond that which cannot be resolved by managers and human resources, it is often the executive director who is called upon to help with the situation. The executive director is in charge of establishing the company’s course and making sure it is in line with the overall mission and objectives. It is infrequent for the executive director to manage the process completely on his or her own; however, he or she is usually the one charged with providing direction in the execution of the plan.
Who is a non-executive director?
A non-executive director, commonly referred to as NED, is a director who is a part of the board of directors of an organisation and contrary to the rest of the directors does not take an active part in the day-to-day running of the organisation. They perform the role of assurance and strategic direction.
They must participate in board meetings but their role in the company can be as varied and extensive as involving in special projects, liaising with investors, and promoting the company externally.
Operative directors are not employees in the same way as executive directors since they do not have any duties related to managing the corporation on a day-to-day basis.
Nevertheless, it is important to note that the Companies Act 2006 does not differentiate between executive and non-executive directors on the lines of their definitions and roles. Therefore, both non-executive directors are held to the same duties, responsibilities, and potential liabilities as executive directors.
What are the roles of a non-executive director?
Provide independent oversight since they do not engage in day-to-day company operations. This allows them to be unbiased in the board’s decision-making process.
They are also in charge of focusing on broader policy and governance issues. A non-executive director’s responsibility includes ensuring that the organisation complies with legal and regulatory requirements and fulfils its obligations to stakeholders, customers, and employees. Business operations involve a significant amount of legal terminology and responsibility, and regulations are constantly evolving. The non-executive director’s role is to guarantee that everything is executed perfectly.
Additionally, non-executive directors are in charge of overseeing the strategic planning process of the company. When a company is facing challenges in making decisions about strategy and planning, the insights of a non-executive director can be valuable.
Besides, these individuals are charged with the duty of communication. They are expected to relate differently to the board’s discussions and even challenge the management where it is necessary. They are in charge of conveying any concerns that may have been missed or neglected by the executive management which is primarily concerned with the day-to-day running of the business.
What are the key differences between executive and non-executive directors?
Role and responsibilities:
The company’s executive directors play a hands-on role in managing the company’s daily operations, holding positions like CEO, CFO, or COO, and ensuring the implementation of company policies and strategies.
Non-executive directors offer impartial supervision and strategic guidance, concentrating on broader policy and governance matters without involvement in day-to-day operations.
Employment status:
The company’s executive directors are on the payroll and receive a salary and benefits. They are under employment contracts and play a role in the day-to-day management of the company.
Non-executive directors are not employees of the company, instead, they are paid in the form of fees or equity. They do not have employment agreements and refrain from daily management duties at the firm.
Independence:
Executive directors cannot be independent as they are part and parcel of the management team belonging to the company and are interested in its performance.
In contrast, non-executive directors are frequently independent, offering an impartial viewpoint. Their autonomy is essential for ensuring effective supervision and governance.
Decision-making:
Directors in executive roles play a direct part in making decisions and carry the responsibility for executing strategies and policies.
Conversely, a non-executive director participates in a range of strategic discussions and provides strategic advice, but does not engage in executive decision-making processes.
Duties and responsibilities in law:
The statutory duties and liabilities imposed under corporate governance are also applicable to both the executive and non-executive directors. These responsibilities include the responsibility to the company and its shareholders.
Statutory obligations, liabilities, and responsibilities of executive and non-executive directors are almost the same. They also perform board functions and are required to act in the best interest of the company. The company’s shareholders have the authority to retire and re-appoint them annually. Nonetheless, the most significant difference lies in their degree of participation in the day-by-day activities of the enterprise as well as in the application of their knowledge, experience, and skills.
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FAQs
Q: What does a non-executive director do?
Ans: A non-executive director’s role does not include daily operational involvement. Instead, they concentrate on governance and long-term strategic matters.
Q: Do non-executive directors get paid?
Ans: Yes, non-executive directors (NEDs) do get paid, but their compensation structure is different from that of executive directors. Their remuneration package may include a fixed amount and compensation for attendance at meetings. They can also be paid via dividends, equity, etc. Their remuneration is not linked to performance.
Q: Can a non-executive director be a shareholder?
Ans: Yes, a non-executive director (NED) can be a shareholder in the company they serve. Owning shares can align their interests with those of the shareholders, promoting a focus on long-term value creation.
Q: Are non-executive directors employees?
Ans: No, non-executive directors (NEDs) are not considered employees of the company. They are members of the company’s board of directors who do not engage in the day-to-day management of the organisation. As a result, they provide their oversight and direction, often looking towards the development of policies and strategies instead.
Q: Are all non-executive directors independent?
Ans: The independence of non-executive directors is not in question for all cases. Most non-executive directors are independent, which means they do not have any material relationship with the company that would affect her judgement. However, some may be connected in ways that could influence their decisions.
Independent NEDs are appreciated, among other things, for the fact that they are objective and do not have interconnections with the firm, management, or even shareholders. This neutral position enables them to give sound advice and supervision without being affected.
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