Role of Non-Executive Director in a Company

Introduction

A company is an invisible, artificial and an intangible person which exists only as a fiction of law, in the contemplation of law. It does not have enough capacity i.e. brain and body to make decisions and put them to action. Therefore, it is compelled to act through others[1]. A company must have directors for this job. A director is appointed to direct the manner of daily business activities along with meeting the financial and statutory obligations of the company. The term ‘Director’ is defined in the Companies Act, 2013 (hereinafter referred to as the Act) in Section 2(34) to mean a director appointed by the Board of a Company. A ‘Board of Director’ is the term used jointly for the Directors. Section 2(10) of the Act is of utmost significance in this regard which defines the term Board of Directors. The term Board of Directors (hereinafter referred as the Board), in regards to a company, is a body formed collectively by all the Directors of the Company. The position of a Director in a company is important, rather a difficult one. The process of classifying them is a hectic task too. Various kinds of divisions have been created while designating Directors. One such classification is Executive Directors and Non-executive directors. An executive director is a director who holds a position on the Board of Directors. They are the employees of the company and are liable for its management. They have a significant interest in the company’s affairs as it is a source of its income, his role in the company is such that he gets to supervise and manage the affairs of the company. This makes him prone to misusing their power for their personal gains whereas a non-executive director is appointed through a letter of appointment. They are the part of the Board of Directors of the company but are not associated with the executive team of the company in any capacity. Their job is more in the nature of monitoring independent from the management of the company. They do not involve themselves in the day to day management of the affairs of the company but they are thoroughly involved in the policy making and planning related to the company. They are appointed to protect the interests of the company’s investors. As this article focuses on the role of the non-executive directors, the author shall be discussing various aspects regarding the role of non-executive director in a company.

Non-Executive Director

There are different kinds of Directors in a company. They are differentiated on various grounds, like gender, manner of appointment, qualification, residential status etc. One such classification is their role, the process of appointment and the portfolio of the job. On this basis, the Directors are further classified on two grounds- Executive and Non-Executive. A non-executive director is a director appointed in the Board of Director but does not form a part of the officers of the company, also called the executives of the company. How their work profile differs from an executive director is from the fact that they are not involved in daily affairs and management of the company. His role is limited to major decision making regarding the policies and plans for the company. Additionally, they are burdened to keep a check on the executive directors to ensure that their actions are not going against the interests of the shareholders of the company. An executive director may alternatively be called an external director, an independent director or an outside director. Their job is to monitor how the executives of the company are functioning and to raise an objection if any mismanagement comes to their notice.

As a non-executive director on the board does not have any managerial duties in the company, therefore a non-executive director does not need to be appointed based on previous experience or qualification. They are appointed for securing the interests of the shareholders and luring the prospective investor. The appointment, therefore, generally depends on the public standing and community value of a person.

Even though the job of non-executive directors seems a little different, nonetheless, they are equally responsible for the liabilities of Directors as laid down in the Act and any other law for time being in force. A non-executive director can make a strategy for growth and performance of the company, his opinion is sought to be unrelated to any personal interests, thereby being more direct and reliable as regards to the risks relating to the company and the objectives of the company.

Relevant Cases

For the growth of any process, notably in a diverse scenario like the corporate world, there has to be such emergence that it makes it necessary for such a process to be inevitably accepted. Short for long, any change is accepted only when it becomes impossible to resist the change. Earlier, the needs to have independent and non-executive directors weren’t felt. However, with all the corporate scams coming up in the recent past, in the corporate world, and the role of the Directors being highlighted in them, a necessary urge was felt by the companies to increase the number and the ambits of existence of the independent directors for the company, also to be known as the non-executive directors.The position of a non-executive director is not a strait-jacket idea. It has developed over the years to the current status. The Hon’ble Supreme Court made the following remarks in the landmark case of Official Liquidator, Supreme Bank Ltd. v. P.A. Tendolkar[2]concerning the role of a director vis-a-vis the actions of the company. It was observed by the Apex Court that the fact that the director has acted with due diligence and honesty in the performance of his duties or not. The association of a director with the company is so close that he shall be deemed to be cognizant of, and liable for, fraud or misrepresentation to any party on behalf of the company. His position is such that the apparent conclusion shall always be that he was aware of, and the perpetrator of the actions of the company. This creates a lag in the system because of a possible biasedness which may affect the company negatively. Therefore, the role of a non-executive director comes into the picture and is very important.

The provision for the non-executive director is not given under the Act. However, the position of a non-executive director can be construed from the definition of an ‘Executive Director’ as given under the Act. Section 2(54) of the Act defines the term Director to mean a director who, by virtue of the articles of the company or an agreement with the company or a resolution passed in its general meeting, or by its board of directors, is entrusted with substantial powers of management of the affairs of the company. It includes a director occupying the position of managing, by whatever name he may be called. In simpler terms, it means a person who is employed in the company for whole-time management of affairs of the company.

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Going by the above said definition, a non-executive director shall mean a person who is associated with the company, is a part of the Board, but does not include an executive director, meaning thereby any member of the Board who does not fall under the definition of an executive director shall be a ‘non-executive director’ by default. The directors stand in a fiduciary position with the company which puts them on a duty to perform their tasks with good faith and for the benefit of the company. A very practical and appropriate observation was made in the case of Aberdeen Railway Co. v. Blaikie Bros[3] that the directors cannot be allowed to keep personal interests in the company as it will conflict with their fiduciary duty towards the company. The fiduciary duty purports that a director shall not involve himself in any position which may divide his loyalty from the company, and he is liable to inform the Board as soon as such a situation occurs[4], failing which he is said to have breached the fiduciary obligation on him.

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Liabilities of a Non-Executive Director

A non-executive director is not a full-time employee of the company. But, that does not absolve any liability in regards to their position as a director in the company i.e. they are subjected to the following set of liabilities-

When the tax liability is slapped on a company, all its directors are made liable for its fulfilment, jointly and severally if it is found that the default in tax payment was caused by the negligence of that director.
A non-executive director is responsible for the repayment of the share application or excess share application if it is not repaid by the company within the stipulated time.
If the director hasn’t paid for his qualification shares to the company and the company goes into liquidation, the liquidator may call him for the payment of the amount equivalent to the value of shares he was liable to purchase.
A director may also face civil liability for any untrue statement made by the company through any public document of the company such as the prospectus. This liability is subject to prove that the director was aware of the misstatement.
There is an unqualified liability on the director for any fraud committed by him against the company, the shareholders, fellow directors or any third party dealing with the company.
A criminal liability can also be slapped on a non-executive director for any act or offence which amounts to an offence under any law for time being in force. Leading examples of criminal liability on a director is in matters of dishonour of cheques under Section 138 of the Negotiable Instruments Act, 1881 and for fraud under the Indian Penal Code, 1860.

In the following situations, a director is not liable for the act on behalf of the company-

A Director is not liable for the debts of the company unless there is a fraudulent act done by the director in furtherance of the same.
A Director is also not liable personally for breach of any contract that he entered into, on behalf of the company. He shall not be made liable to pay the damages for the breach to either party.

Unlimited Liability: Generally, the liability of a director of a company is limited to the extent given in the Act or provided in the articles of the company. However, a company may opt for unlimited liability of the Directors by providing for such a provision in the articles of the company.

Role of A Non-Executive Director

A non-executive director is not an employee of the company, therefore, there is no set charter of duties that he is expected to fulfil. However, it shall not be assumed that their role is unimportant in a company. The following are the duties expected from a non-executive director.

Their main duty is to monitor the work done by officers of the company and manage the businesses of the company. Their role is more of mentorship and they are expected to provide guidance and leadership to the organisation.However, they are not directly liable for day to day affairs of the company. Their employment with the company is part-time in nature.
They are expected to attend board meetings and bring forth an independent opinion in the decision making of the company. Further, they contribute in the following manner-
They construe a plan for the development of the company and challenge the shortcomings in other members’ plans i.e. playing an important role in strategizing for the company.
They are expected to scrutinise the performance of management. They must strive to achieve the goals and objectives laid down in the meetings of the company. They have a right to procure any document which shall satisfy them regarding the financial stability of the company. It is their duty to ensure that the company’s assets are being used for the best interests of the company. They shall also be liable for the formation of the risk management plan for the company.
They are liable for quantifying the remunerations for executive directors and other officials of the company. They may also move the resolution for removing any person from the management if they find his/her conduct to be unsatisfactory and against the interests of the company and the shareholders.

One aspect which benefits the companies these days is the practice that, generally, a majority of the members in the Board in the company are non-executive directors, thereby being independent assuring that the interests of the investors are secured.

Since they are given an important position in the company, it becomes imperative for them to follow a time-bound manner in conducting themselves and fulfilling their duties. For this purpose, the duties of non-executive directors are as follows-
They must meet frequently to discuss the conduct of the officials of the company and ensure that the well-being of the company. Further, they are statutorily bound to meet once in a year. This meeting shall exclusively be of the non-executive directors to be hosted by the senior-most non-executive director.
They are allowed to seek any professional advice in furtherance of the duties given to them. The expenses of such advice shall be borne by the company provided the expenditure was legitimate and in the interest of the company.
They may be appointed to serve in one or more Board Committees of the company. As a member of the committee, their duty shall be to advise the committee on the objectives specified for the committee. They may be additionally given any duties relating to the Board.
The role of non-executive directors seems to be part-time as they do not indulge in management of daily affairs of the company. Yet, they are required to give sufficient time to the company. This is to ensure that they are performing the duties given to them with diligence. About this, they are required to-
Undertake that they shall allocate sufficient time to the company and completion of the duties expected from them.
Disclose any other commitment regarding the time involved in that commitment before the appointment.
Keep the Board updated on any new material appointment taken by them, which might affect their efficiency in the current position.

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The above-mentioned aspects are the main ingredients of the key position in the company held by the non-executive directors of the company. This list is not exhaustive as their role is not provided by any statute but through the Articles of a company or the agreement for the appointment of a person in the company. Therefore, the duties and responsibilities of a non-executive director shall differ from company to company, and may also differ in cases of individual agreements in the same company too.

Difference between Executive and Non-Executive Director

In law, much difference does not exist between executive and non-executive directors. However, in the functional capacity, there is a difference between the role of an executive and a non-executive director. Following are the major points of differentiation between an executive and a non-executive director created for functional convenience. It is being categorically stated that the differentiation is not provided for under any provisions of the law.

An executive director is an employee of the company appointed to manage the affairs of the company on a day to day basis whereas a non-executive director is not an employee of the company. He cannot hold any office of the company. He is associated with the company only for advisory functions and monitoring the work of the executives of the company.
There is a statutory duty on the executive director to associate himself with the work of the company. He is answerable for the happenings in the company whereas a non-executive director is not expected to associate with the company full-time. His set of duties is pre-decided and specified in the letter of appointment. He is liable only for the timely completion of those duties and none else. His duties for the company are intermittent in nature to be performed as and when the time arrives.
The remuneration is also a matter of distinction for the two kinds of directors. For an executive director, the remuneration is always payable as he is a full-time employee of the company. For a non-executive Director, the remuneration may or may not be payable depending on the letter of appointment. Many a time, a non-executive director is appointed without remuneration as well. At other times, the payment made to a non-executive director is an ex-gratia payment.
The role of an executive director is broader than a non-executive director in a company. An executive director is wholesomely associated with the company whereas a non-executive director is related only for specific purposes such as securing the interests of the investors and monitors the executives of the company.

Even though there are functional differences in the role played by an executive and a non-executive director in a company, but the law does not recognise any difference. As per the Act, the same set of duties and rights is provided for all directors. Therefore, all directors of the company are on the same pedestal for the law. They are equally liable, jointly and severally for any liability bestowed on them by the law.

Conclusion

The set-up of a company is very complex. The persons pitching the money are someone else whereas the persons managing the business are other. This arrangement provides the right opportunity for a person who has the money to invest and also for a person who is capable of handling the affairs because of his qualification. This, however, also creates friction in the functioning as both the parties wish to exert their control over the other. To balance this system, the position of a non-executive director in the company is appropriate.

A no-executive director is a person who is not a part of the executive of the company, therefore, providing for an independent and unbiased opinion on the table. They are also relied upon by the investors for securing their interests in case the executive directors try to make unnatural gains at their expense. Therefore, the non-executive directors are added in the Board. It is an increasing phenomenon in the 21st century. The percentage of non-executive director in a company is on the rise with each passing day as the important role played by them has been realised of late.

The author sees this development in the corporate world as a welcome move and suggests the law to be made more specific. The position of law in this area is very vague which might cause complex legal battles with the passing time. The law needs to recognise them as a separately, define and put a specific set of regulations regarding the duties and liabilities of non-executive directors.

Editor’s Note: Please change the title to

Roles and Functions of a Non-Executive Director under the Companies Act, 2013
Importance of Non-Executive Director in India
Directors in India: A study of Non-Executive Directors
Non-Executive Director under the Indian Corporate Law: Meaning, Liabilities and Roles
Non-Executive Directors and Executive Directors under the Companies Act, 2013

[1]Lennard’s Carrying Co Ltd v. Asiatic Petroleum Co Ltd, 1915 AC 705.

[2] AIR 1973 SC 1104.

[3] (1854) 1 Macq. 461.

[4] Bristol and West Building Society v. Mothew, (1998) Ch. 1.