Executive and Non Executive Directors under Companies Act 2006

     

Executive and Non Executive Directors under Companies Act 2006

An executive director is a director who works on a full-time basis for his or her company, whether or not this is under a contract of employment. A sole director of a small company will invariably fit this description, even if he or she decides not to adopt it formally. The term ‘executive director’ is most commonly used, though, in the context of large and listed companies in order to differentiate between those directors who have full-time commitments to their company, usually under contracts of employment and those directors who do not, viz ‘Non-executive directors’.

Directors who have been given specific responsibility by the board for dealing with particular aspects of the company’s affairs and who carry status titles that bear this out, eg ‘Finance Director’ or ‘Sales Director’ will invariably be executive directors and employees of the company. Non-executive directors (commonly referred to as NEDs) will not usually be given specific responsibility for the management of any specific aspect of the company’s affairs.

The special status of non-executive directors has been the subject of considerable attention in recent years in the context of developing guidance on corporate governance in – primarily – the listed company environment. NEDs are now looked to provide special input to the process of governance. The fact that NEDs are not involved with their company on an executive, day-to-day basis means that they can offer, and are today expected to offer, a more detached, objective and comprehensive view of how the company’s affairs ought to be directed than might be possible if the company’s board consisted solely of executive directors. Another virtue of NEDs, which is by no means limited to the listed company environment, is that they can provide a board with skills, perspectives and experience to complement the talents of the executive directors. In the light of the increasingly specialised role of the NED, the courts have started to address the question of how the role of the NED differs in law from that of executive directors and how the two groups should be expected to interact.

The UK’s authoritative guidance on corporate governance for listed companies, the Combined Code, has developed and helped to standardise the role of the NED. The Code suggests that NEDs:

•  should constructively challenge and help develop proposals on strategy • should scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance What is a ‘director’?  

•    should satisfy themselves as to the integrity of financial information and that financial controls on risk management are robust and defensible

•  are responsible for determining appropriate levels of remuneration for executive directors and have prime roles in appointing – and where necessary removing – executive directors and in succession planning.

To reinforce the distinctive contribution that NEDs are called upon to provide, the Code states that every board should include a balance of executive directors and NEDs with the aim of ensuring that no individual or group of individuals can dominate the decision-making process. Further, it suggests that, except for ‘smaller companies’ – which in this context means those outside the FTSE 350 – at least half the board, apart from the chair, should comprise NEDs who are considered to be ‘independent’ in terms of their character, judgement and circumstances.

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