Executive director vs non-executive director
An executive director is an employee who runs part or all of the company and also sits on its board; a non-executive director sits on the board and does not run the company. Both are directors in law, with identical duties under the Companies Act 2006. What differs is the job, the pay, the time, the independence and what a court expects of each when something goes wrong.
Side by side
| Executive director | Non-executive director | |
|---|---|---|
| Runs the company | Yes, a function or all of it | No |
| Employment | Employee, service contract | Office holder, letter of appointment |
| Pay | Salary, bonus, often shares | Fixed annual fee |
| Time | Full time | A few days a month |
| Legal duties | Companies Act 2006, sections 171 to 177 | The same, in full |
| Independence | Not independent by definition | Expected to be, within the Code's tests |
| Typical titles | Chief executive, finance director, chief operating officer | NED, independent director, senior independent director, chair |
| Removed by | The board, as an employee and as a director | The shareholders, or by not being re-elected |
The duties are the same, the expectation is not
The Companies Act makes no distinction, and a NED who treats the role as honorary discovers this in court. What the courts do recognise is that the standard of care is judged against the role: an executive finance director is expected to know the numbers because producing them is the job, and a NED is expected to have read them, understood them, and asked when they did not add up. Ignorance is a defence for neither, and delegation is not abdication for either.
Independence, and why it is the point
An executive director cannot be independent of the company; they draw a salary from it and report to its chief executive. A NED is valuable to the extent they are: the Corporate Governance Code lists the circumstances that compromise independence, among them recent employment, a material business relationship, a family tie to an executive, significant shareholding and more than nine years on the board. A board where the NEDs are the chief executive's friends has executive directors in all but name, which is the most common failure of a private company board.
The chair, the SID and the investor director
The chair is usually a non-executive and runs the board, not the company; a chair who also runs the company is an executive chair, which the Code discourages in listed companies. The senior independent director is a NED who leads the other NEDs and gives shareholders a route to the board that bypasses the chair. An investor director is appointed by a fund and sits for it, so is not independent, however non-executive.
Where a fractional executive fits
A fractional executive is an executive, not a NED, held part of the week. A fractional CFO who also sits on the board is an executive director for those purposes, with the pay and independence position that follows, and should not also be counted as the board's independent voice on finance. The confusion arises because both are part-time and both are senior. The test is simple: does this person run something? If yes, executive; if no, non-executive. The fractional versus interim page sets out the operating side of the distinction.
Common questions
What is the difference between an executive director and a non-executive director?
An executive director runs the company or part of it as an employee and also sits on the board. A non-executive director sits on the board without running anything, as an office holder on a fee. Both carry identical legal duties as directors; the job, pay, time commitment and independence differ.
Does a non-executive director have less liability than an executive director?
No. The duties under the Companies Act 2006 apply equally, and both can be disqualified, sued or in serious cases prosecuted. What differs is the standard a court applies: each is judged by what a reasonable person in that particular role would have known and done. A NED is not expected to have run the function; they are expected to have asked.
Can an executive director become a non-executive director of the same company?
They can be appointed, but the Corporate Governance Code treats anybody who has been an employee within the last five years as not independent, so they would be a non-independent NED. It happens with founders and departing chief executives, and boards should be clear that the person is not an independent voice.
Is a chairman an executive or a non-executive director?
Usually a non-executive, and the Code expects the chair of a listed company to be independent on appointment. An executive chair, who also runs the company, exists and is discouraged in listed companies because it concentrates power in one person.
Is a fractional CFO an executive director or a non-executive director?
An executive. They run the finance function, part of the week, and if they sit on the board they sit as an executive director. They should not be counted as the board's independent director on finance, because they are the person that director would be overseeing.
Read next
More on non-executive directors
A board needs governing. A function needs running.
A non-executive director does the first. For the second, the bench lists verified fractional executives with the day rate on the profile, and retained search runs board and full-time appointments for the companies it works with.