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 essential 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 and the Wates Corporate Governance Principles for Large Private Companies.
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 all companies with a premium listing. The Code states that independent non-executive directors should compose at least half of the board. The chair should also be independent. The same individual should not exercise the roles of chair and CEO.
Provisions applicable to unlisted companies include the Wates Corporate Governance Principles for Large Private Companies. In contrast, AIM-listed companies may elect to follow the Corporate Governance Code from the Quoted Company Alliance. The Charity Governance Code applies to charities.
Various task-forces, including the Hampton-Alexander Review (women on FTSE boards) and the Parker Review (ethnic diversity of UK boards), monitor the representation of UK boards. However, their focus is on FTSE companies, and there is limited research available outside of the FTSE.
Executive directors hold a position on the board of directors and are company employees as well as a board member. They have “executive responsibility” for running the company’s business. On top of their full-time executive position, they are appointed to the board, typically by the Nominations Committee or the Board of Directors itself. The CEO, the Managing Director, and the CFO are executives that generally are 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. Approximately 30% of executive directors have non-executive roles elsewhere.
The demand for non-executive directors has increased in recent years, and so as the need for business leaders to transition to non-executive roles or as NED and trustee positions offer attractive professional development opportunities. Non-executive directors tend to be selected and appointed for their personal qualities, experience, and expertise. Good corporate governance mandates that the Nominations Committee or the Board of Directors will have assessed the skills, experience, and knowledge missing on the board before appointing a new NED and will have considered diversity aspects and cultural fit or board chemistry.
The role of non-executive directors is broad. The company appoints non-executive directors through a letter of appointment, and do not employ them. The non-execs 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.
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 remuneration of £60 to 80k for FTSE 100 NEDs, £50 to 60k for FTSE 250 NEDs while SMEs remunerate their NEDs at lower rates, in the £20-30k range. Most roles in the not-for-profit sector are voluntary roles.
Want to know more? What you need to do next:
1. If you are a board member, subscribe to NEDonBoard newsletter.
2. If you are looking to transition to the board as a non-executive director, we invite you to register your attendance at our next complimentary webinar session: “How to secure your first NED role.”
3. If you would like to know more about the non-executive director role, the differences between the executive and non-executive roles, or if you are considering starting your NED journey, please visit the NED Accelerator Programme by NEDonBoard. We applied years of accumulated knowledge and worked with experienced NEDs and chairs to deliver practical and actionable content to professionals looking to successfully and confidently transition to non-exec roles.
4. If you are an experienced board member, consider joining your professional body.