An executive director is a member of the board of a firm (or non-profit) who also has management responsibilities. A non-executive director (NED) is a board member without responsibilities for daily management or operations of the company/organisation. Before we explain the differences between a non-executive director and an executive director, it is important to say that their legal duties, responsibilities and liabilities are the same. Both are highly responsible board-level roles in a company. Both have a fiduciary duty to the company and must act in the best interests of the company.
There are codified duties of directors detailed in the Companies Act 2006, alongside provisions around directorships in the UK Corporate Governance Code.
Directors on the board
The UK Corporate Governance Code states that a board should be unitary – in other words, making decisions as one.
Its provisions apply to most companies – but not all – and suggest that a board should have a strong presence of both executive and non-executive directors. Why? No individual group should dominate decision making, and at least half of the board – certainly in sizeable organisations – should be independent non-executive directors.
This excludes the Chairman, who may in fact be either an executive or non-executive director. There is no legal distinction between the two, but the trend following UK and EU legislation is that the non-executive director’s role has much responsibility, especially in financial companies where reward packages may be higher to attract the right individuals for the challenges in that role.
The UK is also drawing close to the target of 25% female board representation, which is predominately made up of non-executives.
The executive director
An executive director holds a position on the executive board. They have “executive responsibility” for running the company’s business. They will typically be elected by employees and shareholders and might be an employee, officer or stakeholder in the company. Other directors may be representatives of, for example, an institutional investor or a union.
They don’t gain remuneration for their role on the board, although the UK Corporate Governance suggests that “a significant proportion” of their remuneration should be “structured so as to link rewards to corporate and individual performance”.
There is nothing to stop an executive director of one board becoming a non-executive director on another company’s board. Currently around 30% of executive directors have non-exec roles elsewhere.
The non-executive director
The demand for non-executive directors has increased in recent years. Non-executive directors tend to be cherry picked for their personal qualities, experience and specialist knowledge. Good non-executive appointments can create positive PR, and help the organisation generate long-term exposure in the right areas.
Their role is broad. Primarily they will provide objective criticism on board matters – “constructive challenge” – and facilitate strategic decisions by the executive directors. Since they monitor the executive management, it is vital they are impartial and not influenced by other associations, shareholdings or directorships. Therefore they must be Independent of other stakeholders or interested parties. However, in all activities, they must act in the interests of those who have an interest in the company, such as employees, clients, shareholders and society in general.
Non-executive directors also have a mentoring role to advise and guide Chairmen and Chief Executives where issues arise, or prior to them being brought up in board meetings. They are the ‘critical friend’ of the CEO and executive team, with 50% of their role asking questions on how the business is run in the best interests of its stakeholders, while spending 50% of the time supporting the team towards mission success and growth. They can also sit on sub committees to ensure the company benefits most from their skill sets.
The non-executive directors will also be reimbursed and get additional pay for attending meetings, with an upward trend in their remuneration now beginning to plateau.
According to PwC’s report “Non-executive director fees 2104”, the base fee for a non-executive director in a FTSE 100 company is £65,000 dropping to £48,000 in a FTSE 250 and £40,000 at an SMC. Additional fees are paid for representation on audit, remuneration and nomination committees of between £4000 and £13000 per committee.
Next week, we will explore the difference between an executive chairman vs non executive chairman.