Oversight and Accountability: The Role of Executive andNon-Executive Directors in a Company
The management of a company is entrusted to the board of directors which acts in a fiduciary capacity for the shareholders of the company. Usually, in small private limited companies, there is no separation between the ownership (shareholders) and the management (board of directors). This means that the significant shareholders are also the directors on the Board of the company, which make oversight and accountability one and the same thing.As a company expands and grows and brings in investors/general members of the public, the ownership and management of the company gets separated. Since all the day to day decisions of the company are made through the board of directors, it becomes necessary to exercise some level of control and oversight on the board. This is done through introduction of non-executive/independent directors on the board who oversee the functioning of the board to ensure that the board is acting in the best interests of the company.
Major distinction between Executive and Non-Executive Directors
The primary distinction between an executive and a non-executive director revolves around the concept of oversight and accountability. Non-executive directors oversee the activities of the board of directors of the company, to ensure that business decisions being made are prudent and the board is functioning in accordance with the business strategies and plans, whereas executive directors are accountable to the shareholders of the company as they are involved in the day to day activities of the company and are responsible for execution of business strategies and plans.
Non-executive directors may also be on the board either to protect their interests as shareholders (or as a nominee of such shareholders), overseeing the activities of the board, or giving significant value-add through his/her technical expertise. Promoters (persons who are in the overall control of the company) are not treated as non-executive directors of the company, as they are assumed to have control in the day to day management and functioning of the company due to their shareholding and board control. Another important distinction is that executive directors usually receive a salary from the company whereas non-executive directors receive sitting fees for attending meetings of the board, or in some cases consultant fees/retainer for their contribution to the company.
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