In this blog post, we explore the differences between the roles of executive and non-executive directors.
An executive director is a member of the board of a firm (or a non-profit organisation) who also has management responsibilities. A non-executive director (NED) is a board member without responsibilities for daily management or operations of the company or organisation.
Before we explain the differences between a non-executive director and an executive director, it is important to remind the NEDonBoard community that the legal duties, responsibilities and liabilities of executive and non-executive directors are the same. Both executives and non-executives have board-level roles and 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 (s.172), alongside provisions around directorship in the UK Corporate Governance Code.
Directors on the board
The UK Corporate Governance Code, which updates came into force on 1st January 2019, states that a board should be unitary – in other words, making decisions as one. Its provisions apply to all companies with a premium listing. The Code states that at least half of the board should be made of independent non-executive directors. The Chair should be independent, and the roles of Chair and CEO should not be exercised by the same individual.
Provisions applicable to unlisted companies include the Wates Principles (published in 2018 and available on the www.frc.org.uk website) for large non-listed companies while the new Corporate Governance Code from the Quoted Company Alliance applies to medium and small private companies (subscribers of QCA only). The Charity Governance Code published end of 2017 applies to charities.
Representation on UK boards is monitored by various task forces including the Hampton-Alexander Review (women on FTSE boards) and the Parker Review (ethnic diversity of UK boards).
Executive directors hold a position on the board of directors. They have “executive responsibility” for running the company’s business. Executive directors are a company employee, usually a senior executive, and a board member. On top of their full-time executive position, they are appointed to the board, typically by the Nomination Committee or the Board of Directors itself. The CEO, the Managing Director and the CFO are executives that are typically members of the board.
The UK Corporate Governance Code states that the executive director remuneration policy and practices should be clear, simple, risk-based, predictable, proportional and aligned to the company’s corporate culture.
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-executive roles elsewhere.
The demand for non-executive directors has increased in recent years and so as the demand for business leaders to transition to non-executive roles as retirement approaches or as NED and trustee roles offer attractive professional development opportunities. Non-executive directors tend to be selected and appointed for their personal qualities, experience and specialist knowledge. Good corporate governance mandates that Nomination Committee and Board of Directors will have assessed the skills, experience and expertise missing on the board prior to appointing a new NED and will have considered diversity aspects. The NEDonBoard Succession Planning Board Best Practices guide offers great insights into the appointment of new director (executive and non-executive) (the guide is available upon request to subscribed members of NEDonBoard).
The role of non-executive directors is broad. Non-executive directors are not employed by the company but appointed through a letter of appointment. They challenge, question and monitor the CEO and senior management; they bring an independent perspective to decision-making; they hold senior management to account; they also support and mentor the CEO and senior management. They are a “critical friend” and must act in the interests of the company’s stakeholders (e.g. shareholders, employees, pensioners, suppliers).
Non-executive directors typically sit on the main board and have responsibility on the board sub-committees (e.g. Audit Committee, Risk Committee, Nomination Committee, Remuneration Committee, etc.).
Non-executive directors receive compensation, which tends to be a function of the size of the company, time commitment and complexity of the role. Research points to an average compensation of £60 to 80k for FTSE 100 NEDs, £50 to 60k for FTSE 250 NEDs while large SMEs remunerate their NEDs at lower rates, in the £20-30k range.
If you would like to know more about the non-executive director role, join us at an upcoming 1-day course “How do you become an effective NED on Board”.
If you would like to transition to a non-executive career, join NEDonBoard as a member.
Or join the NEDonBoard community by subscribing to our weekly newsletter.