The Role of Non Executive Directors

Synopsis

This essay talked about the role of non-executive directors and the distinction between executive and non-executive directors, particularly the differences in liability. What’s more, the role of the chairman of the company has been investigated in relation to corporate governance along with the liability of the chairman of the company in their management of the company. Ultimately, the interaction of non-executive directors and the chairman have been discussed.

Introduction

Does anyone have no idea of the director currently? Undoubtedly, director plays a very crucial role in managing a company nowadays, since nearly most of large listed companies have several directors in their management of companies which is called the board of director, along with the members in general meeting.

From the various types of director, non-executive directors and chairman of the company will be mainly talked about in this essay below. At first, role of non-executive director will be discussed. Subsequently, the differences in liability between executive and non-executive directors could be investigated. Moreover, the role of the chairman of the company will be shown in relation to corporate governance along with the liability of the chairman of the company. At last, the interaction of non-executive directors and the chairman will be discussed.

Non-executive directors

The role of non-executive directors

Firstly, having an understanding of executive directors is indispensable. Executive directors are full-time employees of the company, and their main role is to take part in the daily management of the company’s business. In this respect they comprise the senior management of the company under the leadership of the chief executive officer. In the case of large listed companies, the style and the complexity of business mean that the board of directors must delegate substantial control of the company’s activities to its management. (Savage 2010)

However, non-executive directors are not directly involved in the daily management of the company’s business. A non-executive director is a member of the board of directors of a company who does not form part of the executive management team. He or she is not an employee of the company or affiliated with it in any other way. They have a part-time involvement in the company and participate in board meeting or meetings of the management team headed by the CEO. They bring an independent view and judgment on resources, appointments and standards of conduct, and often an outside or board perspective to the board’s deliberations. Their role is to consider the interests of the company as a whole and the general body of shareholders, which is separated in the following areas:

•Strategy: Non-executive directors should constructively challenge and contribute to the development of strategy.

•Performance: Non-executive directors should scrutinize the performance of management in meeting agreed goals and objectives and monitoring, and where necessary removing, senior management and in succession planning.

•Risk: Non-executive directors should satisfy themselves that financial information is accurate and that financial controls and systems of risk management are robust and defensible.

•People: Non-executive directors are responsible for determining appropriate levels of remuneration of executive directors and have a prime role in appointing, and where necessary removing, senior management and in succession planning.

A crucial aspect of best practice corporate governance is that boards of listed companies comprise a majority of non-executive directors who are independent of management, substantial shareholders and material suppliers or customers of the company. The effectiveness of company boards as monitors of management is enhanced by the appointment of a significant number of independence non-executive directors. Therefore, non-executive directors are the custodians of the governance process. Even though they are not involved in the day-to-day running of business but monitor the executive activity and contribute to the development of strategy. (Riddle 2009)

Non-executive directors can also play an important role in sensitive areas such as where conflicts of interests arise or where the interests of management and the company as a whole diverge. This may occur in relation to remuneration, related party transactions and succession planning. Corporate governance best practice provides for these types of issues and the functions internal control and accountability to be delegated to board committees controlled by a majority of independent non-executive directors.

Differences between executive and non-executive directors

As a matter of effect, executive and non-executive directors have the same responsibilities in law. The role of a non executive director has a positive contribution to making and ensuring that the board fulfils its main objectives. He can exercise an impartial influence and bring to bear experience gained from other fields; executive directors would therefore be well advised to consider the appointment of such directors to serve alongside them. The duties of directors are owed to the company as a whole. Their duties and responsibilities arise both out of common law and out of statute and can be classified as follows:

• Fiduciary duty to act honestly and in good faith;

• Duty to exercise skill and care; and

• Statutory duty

Directors should bear in mind that breach of these duties may result in their being judged unfit to be concerned in the management of a company and lead to their disqualification as directors.

It is true that a non-executive director isn’t bound to give continuous attention to the affairs of his company. His duties are of an intermittent nature to be performed at periodical board meetings, and at meetings of any committee of the board upon which he happens to be placed.

Non-executive director is not, however, bound to attend all meetings, though he ought to attend whenever in the circumstances he is reasonably able to do so, and also that in respect of all duties that, having regard to the exigencies of business and the articles of association, may properly be left to some other official, a director is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly. (Murphy 2010)

However, non-executive directors cannot remain totally aloof from the affairs of the company and then take shelter behind the plausible defense that they had no hand in the management of the company, as such aloofness may be negligence. Executive directors are often subjected to severe test and to liability for lack of reasonable care and skill or for being negligent in managing affairs of a company. Sometimes, however, courts take stricter view of the matter and render even non-executive directors, for liability.

Chairman of the company

Role of the chairman of the company

In companies, the importance meaning of the chairman cannot be ignored by anyone since he really takes on such a significant position in directing and managing the company. The chairman is selected by a company’s board to lead the board of directors, preside over meetings, and lead the board to consensus from the disparate points of view of its members. Therefore, the chairman is the presiding director over the other directors on the board and is expected to be fair, a good listener, and a good communicator.

For most of the time, the chairman and the chief executive officer collectively are responsible for the leadership of the company. The Chairman is responsible for leadership of the board, ensuring its effectiveness and setting its agenda. Also, the Chairman facilitates the effective contribution and performance of all board members whilst identifying any development needs of the board. Besides, he also ensures that there is sufficient and effective communication with shareholders to understand their issues and concerns. On the contrary, the CEO is responsible for executing the strategy agreed by the board and developing the group objectives through leadership of the senior executive team. On the one hand, he will recommend to the board any investment or new business opportunities which meet this strategy. On the other hand, the CEO is responsible for meeting with shareholders and ensuring effective communication. (Soskin2010)

The chairman’s role includes managing the board’s business and acting as its facilitator and guide. This can include:

•Determining board composition and organization;

•Clarifying board and management responsibilities;

•Planning and managing board and board committee meetings;

•Developing the effectiveness of the board.

In public companies, the role of the chairman of the board is distinct from that of the company’s CEO or managing director. This point has more recently been brought into focus after corporate governance shortcomings were observed in companies where the two roles are combined. It is believed that the separation of functions within the board of directors or in the structure of the supervisory board and management board would facilitate control over the workings of the company and increase the accountability of the CEO or chairman of the management board.

Liability of the chairman in their management of the company

The chairman of a company is under an obligation to disclose to the public or to the shareholders the company’s accounts, which must be truthful and give a fair presentation of the company’s financial results. If the chairmen willfully breach this obligation they may be held criminally liable. In relation to limited liability companies with supervisory boards, the chairman of the supervisory board may be held criminally liable if his powers within the company are broader than mere supervisory powers.

Besides, in common law, the person who appointed as the chairman of the meeting is deemed to have been given authority by the meeting to regulate its proceedings. As this is a form of delegated authority, the chairman must still act in accordance with the wishes of the majority at the meeting, unless exercising a power conferred by statute or the company’s Articles of Association, or one that the courts have ruled can be exercised by the chairman without reference to the members. The chairman has an overriding duty to act in good faith in the best interests of the company and is responsible for: the proper conduct of the meeting; the preservation of order; ensuring that all shades of opinion are given a fair hearing; and ensuring that the sense of the meeting is properly ascertained and recorded.

Interaction of non-executive directors & the chairman

A strong and effective board of directors should comprise the executive chairman, several executive directors and a few non-executive directors. The executive directors are responsible for the operation of the business while the non-executive directors bring independent objective judgment to bear on board decisions by constructively challenging management and helping to develop the group’s strategic objectives. Moreover, all of the directors have fiduciary responsibilities to the Company.

Each of the executive directors has extensive knowledge of the fresh produce industry, in addition to wide-ranging business skills and commercial experience. All of the directors bring an objective judgment to bear on issues of strategy, performance, resources and standards of conduct. Board members are selected because of their pertinent experience and appropriate training is available to them whenever necessary. On appointment, new directors receive an induction into the group’s activities and into the operation and procedures of the board.

The chairman is responsible for the running of the board including setting its agenda, ensuring its effectiveness and managing the interaction between the executive and non-executive directors. He is also responsible for ensuring timely and effective communication with shareholders. Responsibility for running the group’s business rests with the executive directors comprising the executive chairman, the chief operations officer and the finance director. The board is satisfied that this division of responsibilities is appropriate for the size of the business and ensures that no one director has exclusive decision making powers.

Conclusion

In conclusion, if a strong and effective board of directors, non-executive and chairman of the business are both essential and of vital significance that can be emphasized for times and times because each position will exercise its own unique powers and obligations that any other positions cannot replace.

In this essay, first of all, role of non-executive director has been discussed. Besides, the differences in liability between executive and non-executive directors have been investigated. Moreover, the role of the chairman of the company has been shown in relation to corporate governance along with the liability of the chairman of the company. Finally, the interaction of non-executive directors and the chairman has been talked about.

Overall, shareholders own limited companies but they don’t run them, and that job is given to the directors. Therefore, every limited company is supposed to attach much more importance to the directors in the company since directors have many business responsibilities for ensuring the success of their company, in areas such as health and safety, employment law and tax.

Reference

Riddle 2009, “Non- Executive Directors”, NHS Yorkshire and the Humber, viewed on 25 Nov 2010,

Savage 2010, “From CEO to non-executive director”, CEO forum group, viewed on 25 Nov 2010,

Murphy 2010, “Role, Powers, Duties and Liabilities of Non-Executive Directors”, Chase Cambria Company, viewed on 27 Nov 2010,

Soskin2010, “The role of a chairman”, A crimson Business publication, viewed on 27 Nov 2010,