The difference between executive and non-executive directors

A recent court decision describes the legal differences between an executive director and a non-executive director.

As summarised by Guerdon Associates, key points made by Justice Dixon in the Supreme Court of Victoria in the recent decision of Jaques v AIG Australia Ltd [2014] VSC 269 (13 June 2014), include:

The essential characteristic of an executive director is his or her discharge, usually as an employee, of executive functions in the management and administration of the company. Non-executive directors are usually independent of corporate management. In contemporary corporate governance theory, the role of independent, non-executive directors is encouraged.

The directors rely on management to manage the corporation. The board does not expect to be informed of the details of how the corporation is managed.

Another division of function is between the non-executive directors and the CEO or managing director. Generally a CEO is a director to whom the board of directors has delegated its powers of management of the corporation’s business. Usually the CEO is employed under a contract of service which will either include an express term or, in the absence of an express term, an implied term, that the CEO will exercise the care and skill to be expected of a person in that position.

The degree of skill required of an executive director is measured objectively. In contrast to the managing director, non-executive directors are not bound to give continuous attention to the affairs of the corporation. Their duties are of an intermittent nature to be performed at periodic board meetings and at meetings of any committee of the board on which the director happens to be placed. Notwithstanding a small number of professional company directors, there is no objective standard of the reasonably competent company director to which they may aspire.

It is well accepted that the office of managing director, the classic executive director, has powers of day-to-day management of a company that are exercisable without reference to the board as a delegated executive management function. In contrast, appointment as a director, other than as managing director, carries no express or implied grant of executive power.

The position of director does not carry with it any ostensible authority to act on behalf of the company. Directors can only act collectively as a board and the function of an individual director is to participate in decisions of the board.

It is a question of fact whether a person has assumed the powers of a managing director or an executive director, with the approval of the company. The critical aspect of that inquiry is whether the company approved, or perhaps acquiesced, in that assumption of power.

Whether a director, other than the managing director, is an executive director may depend on whether there is some feature of the company’s constitution or conduct of the company in general meeting or of the board of directors that evidences the delegation of executive function to that director to operate as an executive of the company. The classic example is board approval of a contract of employment of a director as an executive of the company.

Usually, an executive director has simultaneous parallel duties owed to the company, on the one hand by virtue of the office of director under statute and at general law, and on the other hand, as an executive employee under an express or implied employment agreement.