All the companies are managed and run by the company’s top executives, i.e. the board of directors who are appointed by the shareholders at the general meeting to handle the affairs of the company on their behalf. The composition of the company’s Board of Directors includes both Executive and Non-Executive Directors, wherein the Executive Directors have management responsibilities.
Hence, the executive directors look after the routine operations. They represent the senior management staff of the organization.
On the contrary, the Non-Executive Director, shortly referred to as NED does not have management responsibilities. They are the guardian of neutralness, who seek to safeguard the company’s interest.
While the executive director possesses full-fledged knowledge of the company, the non-executive director is supposed to have a broader oversight. In this section, we are going to discuss the differences between executive and non-executive director.
Content: Executive Vs Non-Executive Director
Comparison Chart
| Basis for Comparison | Executive Director | Non-Executive Director |
|---|---|---|
| Meaning | An Executive Director is the one involved in the routine management of the firm as well as he/she is the full-time employee of the company. | A Non-Executive Director is a member of the company's board, but he/she does not possess the management responsibilities. |
| Represents | Internal Directors | External Directors |
| Appointment by | Letter of Employment | Letter of Appointment |
| Appointment to board | By Nomination committee or By shareholders (as the case may be) | By shareholders |
| Independence | Not independent | Independent |
| Remuneration | Salary | Service Fee |
| Strategy | Formulation and Implementation | Consideration and Review |
| Includes | CEO, MD, CFO, etc. | Chairman |
Definition of Executive Director
Executive Directors are the working directors, hired by the company, for salary and who holds a position in the company’s board. And so, they are the employee of the company and the member of the board as well.
The executive directors are the whole-time directors of the company who report to the company’s Chairman. They work for the company in a senior capacity, mainly associated with the policy concerns and functional areas of primary strategic importance.
Executive Directors are entrusted with the responsibility of running and managing the company’s business, including the development of plans. The power to look after the company’s management is either delegated by the company’s board or directed by the Articles of Association.
They are elected to the board by the Nomination Committee or by the company’s board itself. His/Her role in the company is to formulate and implement such strategies for the company which are not just cost-efficient but time-efficient as well.
Definition of Non-Executive Director (NED)
The board of Directors of a company comprised of Non-Executive Director (NED), along with the Executive ones, who do not take part in the management and operation of the company but plays a crucial role in the formulation of policies and plans, and decision making of the company.
The appointment of Non-Executive Directors is based on their qualification such as depth of knowledge and breadth of experience, which helps the board in availing relevant insights and building contacts.
The prior reason for appointing a non-executive director to the company’s board is their independence from the company’s management and other stakeholders. Hence, they bring objectivity, unbiasedness, calibre and other qualities to the board. And so at the time of endorsing the NED for the company, it is equally important that the board remains loyal and honest, particularly when there is a conflict of interest.
They don’t just monitor the effectiveness of the company’s management, but also assess the financial reports so as to ascertain the risks if any. The company’s Chairman and Chief Executives often consult with the non-executive director on the broad matters, to get a different perspective.
Responsibilities of Non-Executive Director (NED)
- Strategic Direction
- Monitoring
- Communication
- Audit
Key Differences Between Executive and Non-Executive Director
Upcoming points will discuss the difference between Executive and Non-Executive Director:
- Executive Directors are not just a member of the company’s board, but they are also the employees of the company, charged with executive responsibilities of managing the enterprise. On the other hand, Non-executive Directors are the independent directors of the company appointed with the aim of bringing a certain degree of objectivity in the organization’s decision.
- Executive Directors represent the internal directors of the company, whereas the Non-executive Directors are the external directors.
- An executive director is hired by the company under the Contract of employment, and so he/she is a full-time employee of the organization. Conversely, the non-executive director is appointed under a Letter of Appointment, as they are self-employed.
- An executive director looks after the company’s affairs and management on a day to day basis and so he/she is not independent of the corporate management. However, a non-executive director is independent of the company’s management as well as of the interested parties.
- Where executive directors of the company are appointed by the shareholders of the company or by the nomination committee, non-executive directors are elected to the board by the company’s shareholders.
- The executive directors are the salaried employees of the company, whereas non-executive directors get service fee as remuneration for the services rendered by them.
- The main task of the executive directors is the formulation and implementation of the strategies and policies. As against, the non-executive directors tend to consider and review the company’s strategies and policies.
- While the company’s Chief Executive Officer (CEO), Chief Financial Officer (CFO) and Managing Director (MD), are the executive director of the firm, Chairman is the non-executive director.
Conclusion
Both Executive and Non-Executive Directors have similar legal duties, responsibilities and liabilities, as well as they perform board-level roles and are expected to act in the prime interest of the company. They are subject to annual retirement and re-appointment by the company’s shareholders.
Tulonga Erastus says
Very clear explanation