A director is usually person who carries out executive responsibilities and is a member of the board of directors, elected by members of the company or organisation in question. By law directors have certain responsibilities and obligations towards the company and its members. In the UK, the company law does not distinguish between executive and non-executive directors. The ultimate legal definition of a director depends on the actual responsibilities rather than the title itself. Hence, a person can be identified as a director without being a member of the board of directors or even employed as a director.
What are the most common types of directors?
In the UK, there are two main types of directors, executive directors and non-executive directors. There is nothing preventing companies from giving official titles such as creative directors or finance directors. Legally, it does not make a difference and in fact only in business sense there is a difference between non-executive directors and executive directors.
Executive directors are people who sit on the board of directors and take charge of the company’s business affairs including:
- Business development and management;
- Company’s assets management.
Typically, executive directors are engaged on a full-time basis. This is achieved either by formal employment or self-employment.
A non-executive director is a person who is a member of the board of directors but who is not involved in a day to day running of the business. Non-executive director is usually not an employee of the company nor is related to it in any other way than being a member of the board of directors. He or she is not an employee of the company or affiliated with it in any other way. Non-executive directors can however also own shares in companies.
In the UK, the Higgs Report published in 2003 reviewed the role and effectiveness of non-executive directors. The report states that non-executive directors are usually involved in the following areas:
- Business Strategy – while executive directors are employed by the company to form future business strategies, non-executive directors’ responsibility is to actively evaluate viability of the plans and provide feedback.
- Business Performance – as well as helping to develop an effective and efficient commercial strategy, non-executive directors should monitor performance of executive directors in meeting overall objectives. This includes making necessary adjustments to the board of directors by replacing non-performing directors with more experienced and adequately experienced members of the executive management.
- Risk Management Procedures – non-executive directors should work to implement effective financial control and risk management strategies.In some situations, particularly insolvency, directors can be held personally accountable.
- Financial Risk Management – a non-executive director should always assess financial data provided and identify potential risk. All data should be verified for its accuracy and adherence to financial controls and risk management systems.
- Human Capital – part of non-executive directors’ duties involves ensuring that levels of salaries and bonuses are adequately set for the executive board members. This not only includes ensuring that remunerations are not excessive but that packages are proportionate to goals and remain competitive for the best performers.
- Succession Planning – non-executive directors are responsible for appointments and removals of executive directors and as such should ensure that the company has sufficient human resources to ensure that appropriately trained and experienced people can be utilised to their full potential as replacements for most senior roles that become available.
It is vitally important that non-executive director always remains impartial in relation to his decision-making.