Difference Between Executive and Non-Executive Directors

Many people use the term ‘director’ in a flexible manner across industries and roles. However, an individual who has been appointed a director of a company is responsible for overseeing the company’s affairs. Likewise, they have various responsibilities and obligations under the Corporations Act 2001. This article will outline the differences between an executive, non-executive and independent director. It will also discuss the director appointment process and the concept of shadow directors.

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Role of Executive Director

Typically, an executive director is an individual who involves themselves in the day-to-day operations and decision-making processes of the business. Likewise, they will typically be an employee of the company, for example, a Managing Director or a Chief Executive Officer. Executive directors are usually paid a salary. Also, an employment agreement will outline their duties and responsibilities to the company (in addition to their role as director).

Role of Non-Executive Director

A non-executive director is not usually involved in the day to day operations of the business. They will also not be as familiar with the finer details of the business operations. However, non-executive directors usually bring added value by having thorough C-suite experience in running businesses and being familiar with corporate governance requirements. The additional perceived benefit of non-executive directors is their independence and objectivity when making decisions. Of course, this is because they are not as involved in the company’s everyday activities. 

Additionally, non-executive directors will usually be paid a fee for attending weekly/monthly/quarterly board meetings. Also, the company’s corporate governance charter or a non-executive director’s letter of appointment will outline their responsibilities.

Role of an Independent Director 

Further, an independent director is a non-executive director that:

1. has no material relationship with the company;
2. is not a shareholder of the company; and 
3. is free of any business or any relationships that could prevent the independent exercise of their judgment.

The role of an independent director is typically more relevant to listed or larger scale companies. Depending on each listing body, there are specific requirements around the required inclusion of independent directors on a board of directors.

Director Appointment Process

The company constitution or shareholders agreement will usually outline the process for appointing a director. If the company has no constitution or shareholders agreement in place, the replaceable rules set out in the Corporations Act will automatically apply. 

Typically, a director appointment will involve the following steps: 

1. the individual signs and returns a director consent form (and or any other document outlining the terms of their engagement);
2. board resolution is signed approving the appointment; 
3. the company’s director register is updated; and
4. ASIC is notified of the appointment within 28 days. 

Number of Directors 

Notably, there are rules around the number of directors your company can have. 

Director ID Requirements 

Additionally, from 1 November 2021, new Director ID requirements will apply. A director ID is a 15-digit identifier that all directors receive (or someone who intends to become a director) after they verify their identity with the Australian Business Registry Services.

Shadow Director

Further, a shadow director is an individual who has not been formally appointed as a director but has the control and power that a director typically holds. If a court determines an individual to be acting as a shadow director, they will also be subject to the directors duties set out in the Corporations Act. 

Key Takeaways

All directors (regardless of their type) have the same director duty obligations imposed by the Corporations Act. Importantly, the role and responsibilities a director plays in their company will determine the specific type of director they are. Indeed, the key factors will be the level of independence and involvement they have with the company. 

Likewise, an individual can be a (shadow) director even if there have been no formal discussions around their role. A court will determine this by the level of control and involvement they have in the business’ decision-making processes.

If you need help with appointing or engaging a director, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

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