Directors of a company have a large degree of responsibility when it comes to running things, both internally and externally. Some companies will have executive directors and non-executive directors (NEDs). While both types of directors engage in high-level responsibilities to act in the best interests of the company, there are some key differences between the two.
It’s important to understand these differences so that you can ensure you’re running your company properly, and each director is executing their decisions and responsibilities in compliance with the relevant laws.
What Is An Executive Director?
An executive director is best described as the director involved in the internal affairs of the company. They are technically employees of the company, and sit on the board of directors.
An executive director is usually responsible for making key decisions for the companies direction moving forward. This could include developing strategies and identifying long-term goals that complement the company’s financial capacity.
What Is A Non-Executive Director?
A non-executive director has similar duties to an executive director, however, they are more external to the company (we cover these key differences in more detail below).
They aren’t as involved in managing the company’s internal affairs, but they help make key decisions around the company’s strategies and plans.
Since they’re ‘external’ to the company, it’s a good opportunity to invite objectivity and valuable insight to the company’s key decisions. In other words, a non-executive director offers a different perspective so the company can make good, informed decisions.
What Are The Main Differences?
The main difference between an executive and a non-executive director is that an executive director is of a higher level in terms of management.
A good way to differentiate between the two is to look at the executive director as the internal boss, and the non-executive director as an external boss.
Let’s look at a brief summary of these differences.
|Features||Executive Director||Non-Executive Director|
|Responsibility||Executive directors assume an internal leadership role, meaning they manage the business’ activities and engage in high level responsibility||NED responsibilities are a bit broader in that they assist in monitoring aspects of business activities (such as finances) and provide objective insights for internal decision-making|
|Management||Manage the company, including strategies for growth, decision-making and long-term goals.||Do not manage the company but assist in policy development and decision-making|
|Appointment||Appointed by company shareholders or nomination committee||Appointed by company shareholders|
|Employment||They are full-time employees||They can be a part of the board of directors, but they are not employees of the company|
|Independence||Executive directors manage the business internally and are highly involved in the company’s affairs||Non-executive directors are independent of the company. Their main connection to the company is that they are part of the board.|
Now that we’ve gone through a summary of the differences, let’s look at these features in a little more depth.
Roles And Responsibilities
Executive directors manage the company and develop relevant strategies for growth, whereas a non-executive director provides relevant and valuable insights based on their expertise to assist in policy development and decision-making.
So, a NED is an independent director that assists the executive directors in managing the company, but they don’t have the authority to engage in the same level of management.
A good way to look at it is that an executive director is internal, whereas an NED is external. Therefore, an NED focuses on providing objective assistance to help the internal executive director make the bigger decisions.
Executive directors are part of the board, and are also full-time employees. This means they receive all the relevant employment benefits and a salary.
However, an NED is not an employee. They are independent of the company (self-employed), therefore they receive a service fee.
Non-executive directors are not expected to devote all of their time to the company’s affairs. They provide valuable advice and assistance for internal decision-making, but they are not required to be present all the time.
This is also because NEDs are external directors and independent of the company, so the responsibility of running the company falls less on them and more on the executive (internal) directors.
Why Have An NED?
Having an NED is beneficial for the company because an executive director is internal, meaning they are likely to be driven by the best interests of the company. Like we mentioned before, NEDs bring fresh and objective insight into the company and assist in monitoring activities with less risk of bias.
This helps improve the quality of decision-making overall.
They also bring with them the expertise that is required to improve business performance.
What About Directors Duties?
You might be wondering, ‘if executive directors and non-executive directors are different, are they both still subject to directors duties?’
Generally speaking, both executive directors and NEDs have very similar duties and liabilities.
So, the simple answer here is yes. Both types of directors need to comply with the duties set out in the Corporations Act 2001 (Cth). Like executive directors, NEDs will be held liable for any breach of a director’s duty, such as a fiduciary duty.
Some other duties include:
- Acting with due care and diligence
- Acting in good faith
- Not improperly using your position
- Not improperly using information
Even though an NED is not as involved as an executive director, they will still be liable for breaching any of the above duties. We’ve written more about the personal liabilities of company directors here.
Managing a company is always a lot easier if you have the right people guiding you. If you need help appointing directors or if you have any questions about your company structure, Sprintlaw has friendly and experienced lawyers that can help you through the legal processes involved!
If you would like a consultation on your options going forward, you can reach us at 1800 730 617 or email@example.com for a free, no-obligations chat.
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