Question

What is the difference between an ‘executive director’ and a ‘non-executive director’? What is the recent development in this area of law? Refer to the relevant case laws and provide a brief summary of the courts findings. Also refer to the relevant sections of the Corporations Act 2001 (Cth).

Include:

introduction
law
application
conclusion

Answer 1

There are multiple differences between executive directors and non-executive directors and there are some similarities that are important to note as well. Considering that there is no legal distinction between them, the differences primarily lie in the expectations for each role. Executive directors and non-executive directors both play important roles, but for very different reasons. One is not more important than the other and one doesn’t carry a higher status than the other.

Differences between Executive Directors and Non-Executive Directors

When we begin to look at the differences in the roles and the best practices for board composition, it starts to become clear why both roles are so important to good governance.

Executive Director

An executive director is a member of a board or firm who is also an employee of the company and has management responsibilities. Executive directors have executive responsibilities for running the company’s day-to-day business activities. They’re usually a senior executive or a board member.

Nominating and governance committees usually pick the cream of the crop of the senior management executives to serve as executive members of the board of directors. Their board seat is in addition to their regular managerial duties. Executive board directors sometimes serve as non-executive board directors on other companies. In fact, about 30% of executive directors serve as non-executive directors for other companies. If an executive director serves on the board of a holding corporation, he or she may also serve as a non-executive director on the board of a subsidiary. The only exception to this is if that person had some sort of managerial responsibilities for the subsidiary company.

The executive director role is important because it ensures that the rest of the board receives an accurate representation of management and operations.

Non-Executive Directors

A non-executive director is not an owner or a member of the family of a corporate owner. Professional advisors aren’t necessarily non-executive directors; however, professional advisors who are officially appointed as board directors may provide professional advice as a non-executive director who is also a skilled professional.

The value in non-executive directors is that they provide independence and objectivity in their opinions because they have no responsibility for the daily management or operations of the company. Non-executive directors tend to be selected for the skills, talents and abilities they can bring to a board of directors, as well as their personal characteristics. They are also expected to act in the best interests of the company’s stakeholders, including shareholders, employees, pensioners and suppliers.

Having independence from the company, non-executive directors are uniquely positioned to challenge, question and monitor the CEO and the senior management team. In this way, they help to hold management accountable. Non-executive directors also support and mentor the SEO and management team. Non-executive directors also bring an independent perspective to decision-making on important committees, such as the audit, risk, nomination and remuneration committees.

The board awards compensation to non-executive directors, which is usually based on the size of the company, the time commitment and the complexity of the board’s activities.

            Similarities between Executive Directors and Non-Executive Directors

Both positions are board-level roles. Executive and non-executive directors have the same liabilities and legal duties. They both have fiduciary duties, which mean they must place the best interests of the company ahead of their own interests. All board directors owe a Duty of Care, which means that they must act as any ordinary, reasonable person would under the same circumstances.

Boards of directors are unitary bodies, which mean that they make decisions as one. They’re required to support all board decisions and to accept board decisions as their own, regardless of whether they voted against or in favor of board decisions.

The Corporations Act 2001 (Cth) (the Corporations Act, or CA 2001) is an Act of the Commonwealth of Australia which sets out the laws dealing with business entities in Australia at federal and interstate level. It deals primarily with companies but also with other entities, such as partnerships and managed investment schemes. The Act is the primary basis of Australian corporations law.

                               Australian corporate law was the subject of a successful high court challenge in New South Wales v Commonwealth (1990) 169 CLR 482 ('The Corporations Act Case'). In that case, the Commonwealth was found to have insufficient power to legislate in relation to the formation of companies. Section 51(xx) of the Australian Constitution was found to provide sufficient power for legislation applicable only to foreign corporations and corporations already formed within the Commonwealth. This decision led to the creation of a co-operative scheme, involving a referral of power from the Australian states. All Australian states have adopted the Corporations Act 2001 (Cth).