Thursday, August 9, 2012

Executive Directors (EDs) Vs Non Executive Directors (NEDs)

Executive Directors

Executive directors (EDs) are involved in day-to-day operations of the organization.

They are employees of the organization.

They usually receive majority of remuneration based on performance.

 

Non Executive Directors

Non executive directors are not involved in day-to-day operations of the organization.

They are external and independent personnel appointed to monitor performance of executive directors.

They only receive fixed pay regardless of performance in order to maintain their independence.

Roles of Non Executive Directors

1) Scrutiny

Non executive directors should provide Independent95 scrutiny to the board.

 

2) People

Non executive directors should oversee reward schemes and appointment procedures for executive directors. Non executive directors act as a forum for institutional shareholders, internal and external Auditors202 where they are raise their concerns.

 

3) Risk Management

Non executive directors can contribute toward risk management policy and monitors the effectiveness of risk management system and internal controls159. They also reviews risk management system and internal controls for changes in external circumstances.

 

4) Strategy

Non executive directors should contribute their expertise to organizational strategy and challenge risky strategies being followed by CEO and other directors.

Non executive directors should protect the interest of the shareholders to which they are accountable as an agent.

 

Advantages & Dis-advantages of Non Executive Directors

Advantages of Non Executive Directors

NED executive directors can contribute their independent judgement on strategic matters and in ethical dilemmas. Decision reached in consultation with non executive directors is more likely to be acceptable to all stakeholders due to their independent status.

NED may have knowledge from other companies, which they are able to contribute in strategic decision-making.

Non executive directors sitting in the board can enhance confidence of investors in the company due to having independent personnel safeguarding their investment.

Non executive directors sitting in audit committee can provide significant independence to internal & external auditor202, to whom auditors can raise to issues of concern in the event of conflict with management.

Non executive directors sitting in audit committee can enhance the reliability of financial information presented to shareholders and other stakeholders115. This will lead to reduced scrutiny cost when making loan applications and paying taxes.

Non executive directors sitting in remuneration committee can prevent executive directors from rewarding themselves excessive remunerations.

 

Disadvantages of Non Executive Directors

Non executive directors are not involved in company operations require excellent persuasion skills to persuade executive directors to follow their recommendations. Recommendations of non executive directors can be easily disregarded on the grounds of lack of company and industry related knowledge and experience.

It is difficult to identify quality non-executive directors having sufficient knowledge, skills, experience and degree of independence to make reasonable and unbiased judgements. In practice, quality non executive directors are often attracted by blue chip (popular) companies.

In practice, independence of non executive directors is often comprised because of Cross Directorship & Corporate Governance and lack of guidance available on selection procedure for non executive directors.

Non executive directors are highly skilled personnel and having at least equal number of non executive directors as executive directors100 gives rise to significant costs. This cost may not exceed benefits from having of non executive directors on the board.

Non executive directors can make the decision making process slow. As more personnel will sit on the board, more viewpoints have to be considered and an agreement is difficult to reach.

Non executive directors may have executive responsibilities in other organizations. They may not have sufficient time to devote to attend board meetings and monitor company affairs.

Executive directors may perceive non executive directors as division of their authorities. They may become de motivated, which will result in reduced efficiency.