Have you ever wondered what executive and non-executive directors do? Or, for that matter, what the main differences between the two roles actually are? NEDonBoard has the answers you seek.
In this blog, we explore the key differences between the roles of executive directors and non-executive directors. Read on to find out more.
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.
As such, 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 (except for public appointments as the Cabinet Office has implemented a Diversity Action Plan with diversity targets).
What is an executive director?
An executive director is a member of the board of a firm who also has management responsibilities. 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, executive directors are appointed to the board, typically by the Nominations Committee or the Board of Directors itself. The CEO and the CFO are executives that are generally 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.
What is a non-executive director?
A non-executive director (NED) is a board member without responsibilities for daily management or operations of the company or organisation. The demand for non-executive directors has increased in recent years and so has the need for business leaders to transition to non-executive roles. 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 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. They should also have considered diversity aspects and board chemistry.
What does a non-executive director do?
The role of non-executive directors is broad. The company appoints non-executive directors through a letter of appointment and does not employ them. Non-executive directors challenge, question and monitor the CEO and senior management. They bring an independent perspective to decision-making and hold senior management to account, whilst also supporting and mentoring the CEO and senior management. Non-executive directors are a “critical friend” and must act in the best 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). NEDs 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 and £50 to 60k for FTSE 250 NEDs. SMEs remunerate their non-executive directors 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 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 have applied years’ of accumulated knowledge and collaborative working with experienced NEDs and chairs to develop practical and actionable content for professionals seeking to successfully and confidently transition to non-exec roles.
3. If you are an experienced board member join your professional body.