Commercial and Legal Standing of Executive Directors vis-à-vis Non-Executive Directors

As per practical definition, Non-executive Director means any director who is not paid a salary. However, the Managing Director is termed as an Executive Director, even if he is not entitled for any salary emoluments. In view of these definitions, is there actually any significant difference between the Executive Director and the Non-Executive Director?

On commercial parlance, many companies practice to designate employees as Executive Directors, who are actually not on the Board of the company. In the absence of clear definitions in the Companies Act, 1956, it is a general understanding that any employee who is also a Director is called an Executive Director. But according to the regulatory requirements, an Executive Director is an individual holding managerial position and bestowed with decision-making powers for his whole-time service to the company. Further, Form 25C is required to be submitted for appointing a person as Whole-time Directors and the same is not required for Executive Directors.

Explanation to section 197A, it is cleared that a Non-Executive Director does not undertake to devote his whole working time to the company. Whereas an Executive Director in the nature of a whole-time director, extends his professional service to the company


The latest trend in the corporate sector is the appointment of an “Associate Director” of a particular department. However, there is no clear explanation as to whether an Associate Director will join the Board of Directors, whether Form 32 needs to be filed, and is this individual considered a Whole-time Director as he is engaged in the day-to-day business activity of the company? As the company cannot induct all the top Executives to the Board or designate them as Whole-time Directors, the idea of a new role called Chief Executive Officer (CEO) was initiated.

In the absence of any provision in the Articles of Association of the company, the Non-Executive Director is not obligated to tender his resignation to the Board and seek the acceptance from the Board. To ward off any future complications, such Non-Executive Director can send a copy of the resignation to the relevant Registrar of Companies.

Remuneration:

1. The company can pay up to 1% of its profits as remuneration to the Non-Executive Director without breaching the provisions of Schedule XIII, as the this Schedule makes provisions for the remuneration to be paid to Managing Director, Whole-Time Director and Executive Director.

2. Also, in case there is more than one Executive Director, then as per Schedule XIII the total managerial remuneration should not exceed 10% of the profits. However, the corresponding tabular representation should be followed for each individual separately as per the terms of the appointment.

3. An approval from the Central Government is required if the remuneration paid to the Non-Executive Director exceeds the limit set forth in Schedule XIII. If any Director holds any key responsibilities in the company, the prime test for payment of remuneration would be to check whether such Director be considered as a Non-Executive Director; because by virtue of the nature of work, such Director will be automatically treated as an Executive Director.

4. Only a Whole-time Director or an Executive Director is eligible for Sweat Equity Shares as per the provision of Section 79A

5. The premium paid by the company on "Employer – Employee Insurance Policy" for its Executive Directors and handing over the same to such Directors after three years will be treated as perquisite and will for a part of the relevant Directors' remuneration.

Conclusion:

However, in practice the appointment of Non-Executive Independent Director has become a arrangement of convenience with the idea of “Good Corporate Governance” going for a toss. Unless such Independent Directors have significant stakes in the company, it will be naïve to assume that they would be allowed / willing to assert their independence. After all, Non-Executive Directors do get attractive remuneration, not to boast of a good standing in the corporate society, and they would not jeopardize this opportunity by being too assertive or independent in real sense. Also, only directors with real involvement will take active interest in the affairs of the company and contribute to its obligations to shareholders, employees, customers, suppliers, etc.