Difference Between Executive and Non Executive Directors

Edited by Diffzy | Updated on: September 16, 2022

       

Difference Between Executive and Non Executive Directors Difference Between Executive and Non Executive Directors

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Introduction

All businesses are controlled and operated by the board of directors, which is made up of senior executives chosen by the shareholders to manage the business on their behalf at the annual public meeting. For a firm to truly improve, it needs a variety of people. To maintain order in the workplace, several personnel are in charge of various departments. Two positions, executive and non-executive directors are in charge of a company's growth and development; executive directors are in charge of management. The executive directors, therefore, handle the everyday operations. The stand-in for the organization's top management team. On the other hand, the NED, or non-executive director, does not have managerial duties. The non-executive director is expected to have a wider range of scrutiny whereas the executive director has a complete understanding of the firm. The non-executive director is expected to have a wider range of scrutiny whereas the executive director has a complete understanding of the firm.

Executive directors work for a corporation as internal workers. As a result, while making decisions and executing administrative activities, they are not independent, whereas non-executive directors are independent external directors who are particularly hired to offer an independent external perspective. An executive director is a corporate employee. Because non-executive directors are not financially dependent on the firm, they are expected to actively debate executive directors' decisions to assist generate strategic recommendations. As a result, executives are in charge of managing and administering day-to-day corporate operations. Non-executive directors are appointed by the shareholders rather than being full-time employees of the firm. They are chosen for their knowledge, skill, and ability to provide impartial monitoring.

Executive Director vs Non-Executive Director

Both kinds of directors can be found on a board, and both have legal obligations. The nature of their obligations is the primary distinction between these two jobs. While executive and non-executive directors have many characteristics, the only thing that sets an executive director from a non-executive director is that executive directors are actual employees of the firm. They will play a leadership position within the organization and have daily responsibilities, goals, and important deliverables as part of their mandate. Executive directors work for a corporation on the inside. In contrast to Non-executive directors, who are selected specially to offer an independent external perspective, they are not autonomous when making decisions and carrying out administrative tasks. Non-executive directors are expected to actively criticize executive directors' decisions to assist generate recommendations for strategy because they are not reliant on the firm, particularly in terms of compensation.

The primary distinction between executive and non-executive directors is that an executive director oversees a firm's daily operations, whereas a non-executive director is not responsible for overseeing any daily operations or other corporate tasks. Non-executive directors are board members, whereas executive directors are staff members of the firm. One key distinction between the two jobs is the ability to make decisions. In addition to participating on the board of directors, executive directors are responsible for leading and managing their teams or departments. The board is responsible for them. In contrast, non-executive directors make strategic choices that advance organizations and accomplish broad commercial goals. 

The executive director is appointed by the company's nominating committee or board of directors to administer the company's policies. This individual is in charge of all of the company's active initiatives. He or she is in charge of management. He/she reports to the company's none executive director. As a result, he or she is not self-sufficient. Non-executive directors are outside directors who are selected to oversee and correct the organization's various policies. This is an autonomous position, and their experience is their most valuable asset. In exchange for their efforts, these directors are compensated with service fees. Not only do they oversee the company's strategy, but they also oversee the company's finances.

Difference Between Executive Director and Non-Executive Director In Tabular Form

Table: Executive Director vs Non-Executive Director
Parameters of Comparison
Executive Director
Non-Executive Director
Meaning
A full-time employee of the company, an executive director is also involved in the daily operation of the business.
A non-executive director serves on the board of the corporation but is exempt from managerial duties.
Appointed By
Letter of Employment
Letter of Appointment
Appointment to the Board
By the Nominating Committee Owners of Shares
Owners of Shares
Remuneration
Salary
Service Fee
Includes
CEO, MD, CFO. ETC
Chairman
Strategy
Development and Execution
Review and Consideration
Represents
Internal Directors
External Directors

What is Executive Director?

The working directors who are paid by the corporation and hold a place on the board are known as executive directors. A company's executive director is a board member with managerial duties. In addition to serving as a board member, executive directors are also employed by the corporation. For managing the company's operations, they have "executive responsibility." The most senior individuals inside a corporation are often executive directors, who also serve as active Board members. They are ultimately in charge of deciding the organization's structure and strategy, and they actively contribute to the development and growth of the business daily. The responsibilities of the executive director include overseeing the operation of the firm and the development of several continuing strategies.

The Nomination Committee appoints these individuals as board members. The company's board of directors may also conduct this election procedure. The task of overseeing the company's operations, including the creation of strategies, is within the purview of the executive directors. Either the board of the corporation or the articles of association have the authority to oversee the operation of the firm.  An executive director is often a person who participates in the daily operations and decision-making of the company. They will generally work for the business as an employee as well, such as a Managing Director or Chief Executive Officer. Salary is typically received by executive directors.

They oversee the company's daily operations and deal with the execution of the company's business and strategic strategies. As a result, executive directors handle daily operations. The stand-in for the organization's senior executives. The full-time directors of the corporation who answer to the chairman are known as the executive directors. They are senior employees that primarily deal with policy issues and functional areas that are crucial from a strategic standpoint. Because they are officially recognized as members of the Board, executive directors are subject to legal responsibility for the business they oversee. Because these positions frequently begin with the letter C (CEO, COO, CFO, CMO, CIO), executive directors are sometimes known as corporate officers or C-suite executives.

What is Non-Executive Director?

A firm's board of directors is made up of both executive and non-executive directors (NED), who do not participate in the administration or operation of the company but are essential to the development of its policies, strategies, and decision-making processes. External directors known as non-executive directors are chosen to oversee and make changes to the organization's many policies. Their experience is their most valuable quality, and this post is autonomous. One of the requirements for this position is experienced since the corporation makes use of the non-executive directors' perspectives. The need for corporate executives to transfer into non-executive roles has grown in recent years, along with the need for non-executive directors. Non-executive directors are often chosen and appointed based on their traits, backgrounds, and areas of competence. Before appointing a new NED, the Nominations Committee or the Board of Directors must have evaluated the skills, experience, and expertise that the board is lacking.

Non-executive directors are paid properly based on the size and complexity of the positions they undertake, but unlike their executive counterparts, they are not employees of the firm they represent. Non-executive directors serve on a company's main Board and, even though they are not involved in day-to-day operations, they are very important to the organization's strategy and success. Additionally, they won't be as knowledgeable about the specifics of how the company operates. Non-executive directors often get compensation for attending board meetings on a weekly, monthly, or quarterly basis. Additionally, a non-executive director's letter of appointment or the company's corporate governance charter will specify their duties.

They are required to overcome any organizational barrier by thoughtfully and independently addressing the "elephant in the room." Non- executive Directors attend meetings of the board and any committees to which they have been appointed and concentrate largely on-board business. They are often expected to provide the board with unbiased feedback on board concerns and an impartial view of the business because they are not involved in the day-to-day operations of the firm.

Main Difference Between Executive Directors and Non-Executive Directors In Points

  1. Executive Directors are not just members of the board of the firm; they are also paid staff members who are in charge of running the business. Non-executive Directors, on the other hand, are independent business directors chosen to add a certain level of objectivity to the organization's decision-making.
  2. A non-executive director does not have any management responsibilities; an executive director is in control of the company's management.
  3. A full-time employee of the organization, an executive director is employed by the business under the employment contract. The non-executive director, on the other hand, is appointed under a Letter of Appointment since they work for themselves.
  4. While the Chairman is a non-executive director of the corporation, the Chief Executive Officer (CEO), Chief Financial Officer (CFO), and Managing Director (MD) are executive directors.
  5. The development and implementation of plans and policies is the executive directors' primary responsibility. In contrast, the non-executive directors prefer to take the company's plans and policies into account.
  6. While non-executive directors get service fees as payment for their work, executive directors are paid on a salary by the corporation.
  7. Non-executive directors are chosen by the company's shareholders to serve on the board, as opposed to executive directors who are chosen by the company's shareholders or the nominating committee.
  8. An executive director is not autonomous from corporate management since he or she oversees the day-to-day operations of the firm. A non-executive director, however, is impartial toward both the company's management and the interested parties.

Conclusion

Both Executive and Non-Executive Directors undertake board-level functions and are required to operate in the best interests of the firm. They also have identical legal obligations, liabilities, and responsibilities. These two positions serve different purposes, and the non-executive director role occupies a more senior position. The main representatives of shareholders in a firm are the directors. The overall number of directors for a firm must be appropriate. This control makes it possible to maintain a certain degree of balance and ensure that no group of directors outweighs others. Non-executive directors are tasked with assisting executive directors in making strategic choices based on their risk analysis and long-term strategic vision, even though they are not involved in the day-to-day operations of the company. The kind of director a person is will crucially depend on the position and duties they have inside their organization.

The degree of freedom and participation they have with the organization will, in reality, be the deciding consideration. Unquestionably, both EDs and NEDs are crucial to the governance of a firm, with the former serving as both a "director and full-time employee" and the latter simply performing directorship-related tasks. However, in the eyes of the law, they are seen as equally culpable and accountable for any violations of the firm.  A company's total number of directors must be fair. The board of directors of any firm must have an equal mix of executive and non-executive directors, according to corporate governance rules. This control ensures that no group of directors outnumbers others and that a particular degree of balance is maintained.

Although non-executive directors are not involved in day-to-day company operations, they are responsible for assisting executive directors in making strategic choices based on risk assessment and long-term strategic vision. Regardless of how much difference these two titles have, they both have one purpose in common: to achieve the best interests of the firm. They are both equally capable of ensuring their company's ultimate success.

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"Difference Between Executive and Non Executive Directors." Diffzy.com, 2022. Fri. 09 Dec. 2022. <https://www.diffzy.com/article/difference-between-executive-and-non-executive-directors-608>.



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