Definitions and meanings:
Executive Director:
Executive directors are working employees of an organization who are responsible for the top strategic decision-making. The main domain of an executive director is the effective running of business operations. Each executive director has a specific duty to perform based on his department. Executive directors can also be called as internal directors.
Non-Executive Director:
Non-executive directors make part of the board of directors of a company. They usually do not indulge in the management responsibilities and are primarily responsible for the supervision and aiding of executive directors. Non-executive directors are also called as external directors.
Difference between executive and non executive directors:
The main difference between executive and non-executive directors is explained below:
1. Independence:
Executive directors are internal employees of a company. Therefore, they are not independent when making their decisions and performing administrative duties, whereas non-executive directors are independent external directors, who are specifically appointed to bring an independent external view. As non-executive directors are not dependent upon the company especially in terms of remuneration, they are expected to constructively challenge the policies of executive directors in order to help develop proposals on strategy.
2. Employment:
An executive director is an employee of the company. Therefore, executives are responsible for the management and administration of day-to-day business activities. Non-executive directors are not full-time employees of the company, rather they are appointed by the shareholders. They are appointed for their knowledge, expertise and an independent oversight.
3. Remuneration:
The terms of remuneration of non-executive directors are already decided and are not affected by the performance of company either short-term or long-term. Non-executive directors are paid their service fee based on the complexity of their role and the term of their appointment. Executive directors usually have a salary package which consists a mix of fixed salary, commissions and incentives based on company performance, share option schemes and other perks and benefits.
4. Leadership and Roles:
Every board appoints a CEO or ‘Chief Executive Officer’ and a ‘Chairman’. CEO is also called as an MD (Managing Director). CEO is appointed amongst one of the ‘executive directors’ and is responsible for making major corporate decisions and managing the operations of all the departments of the company. However, the ‘Chairman’ of the board is a ‘non-executive director’ and is responsible for effective running of board proceedings.Other than the chairman, non-executive directors appoint a SID or ‘Senior Independent Director’. SID is expected to serve as an intermediary amongst directors where necessary. An SID also serves as ‘Acting Chairman’, if Chairman is unavailable.
5. Nomination:
Executive directors are appointed by the shareholders. In larger companies shareholders normally delegate the duty to appoint these directors to board of directors which in turn delegate the task to the ‘nomination committee’ which is comprised of non-executive directors to ensure transparency in appointments of executives. The non-executive directors are nominated by shareholders and are issued a LOA (Letter of Appointment). If an ad hoc situation arises, a director can be either appointed by the other directors or the government of respective jurisdiction.
Conclusion:
Directors are the primary agents in a company that act on behalf of shareholders. A company must have a reasonable number of total directors. According to the principles of corporate governance, board of directors of any company must have an equal split of executive and non-executive directors. This control makes it viable that no group of directors outweigh others and a certain level of balance is maintained. Although non-executive directors do not take part in the day-to-day operations of business they are responsible for aiding executive directors in making strategic decisions based on their risk assessment and long-term strategic vision.
