Directors and company secretary

Directors Basic questions

What is meant by the terms executive director and non-executive director, and what are the differences?

All directors attend board meetings and vote, and are responsible for the general running of the company, setting policies, stewardship of company assets, compliance with the law and good practice, etc and share overall responsibility for matters that are within the sphere of directors' duties.

An executive director may well be a full time director, though this is not necessarily the case. He will do a day-to-day executive job. A typical example might be a sales director who leads and directs the sales force and sales effort, and may personally sell to customers. It may not be literally true, but you will probably understand what is meant if it is said that an executive director gets his hands dirty.

A non-executive director, on the other hand, does not do a day to day executive job in the company. He 'just' has all the responsibilities mentioned in the first paragraph of this answer. A non-executive chairman has responsibility for running the board but a non-executive sales director is a contradiction in terms.

That's all very well but can you please give more details about the role of non-executive directors?

Certainly, but the first paragraph in the last answer seems quite comprehensive. It refers to all directors and this term, of course, embraces the non-executive directors. Perhaps it is worth repeating.

All directors attend board meetings and vote, and are responsible for the general running of the company, setting policies, stewardship of company assets, compliance with the law and good practice, etc and share overall responsibility for matters that are within the sphere of directors' duties.

Non-executive directors are frequently well-connected and bring to the company a wide range of contacts and experience. The Combined Code emphasizes the distinction between independent non-executive directors and those who cannot be classed as independent. The latter category includes, for example, a former managing director of the company.

Non-executive directors frequently serve on audit committees and other committees, and their detachment makes them particularly suitable for this. The Combined Code includes the following:

'The board should establish an audit committee of at least three, or in the case of smaller companies two, independent non-executive directors.'

The Combined Code also calls for independent non-executive directors to constitute a remuneration committee. Non-executive directors may have a particularly important role in liaising with shareholders and particularly with institutional shareholders.

What is meant by the term 'unified board' and do we have them in Britain?

It is tempting to be facetious and say that boards are often far from unified. In fact, as you will know, boards are sometimes disunited and even downright quarrelsome. This, though, is of course not what is meant by the question.

The term 'unified board' means a board where all the directors, both executive and non-executive, have the same legal rights and responsibilities. Each is responsible for the operations of the company and the actions of the board. The directors may choose to divide up their responsibilities, for example by setting up board committees, but it is not a legal requirement that they do so. When they do, the directors as a whole choose the committee members and can change the committee members. They retain overall responsibility.

The concept of a unified board has been under pressure in recent years. In particular, corporate governance codes, including the Combined Code, specify special responsibilities for non-executive directors. Nevertheless, the principle of a unified board is long established in Britain and it has been retained by the Companies Act 2006. It must be a matter of opinion but many people consider that a unified board is a source of strength. Some people, perhaps the same ones, regret the trend towards non-executive directors policing the executive directors.

 
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