As a commercial lawyer often dealing with company directors and advising them on their roles and responsibilities, from time to time I get asked the question: What is the difference between Executive and Non-Executive Directors? You would think that as the main piece of legislation governing directors and companies in Australia that the Corporations Act 2001 (Cth) would hold the answer, but curiously it does not. There is no definition of either in the Act.
Luckily, the responsibilities of Executive and Non-Executive directors have been the subject of a variety of cases in Australian jurisdictions, allowing some sense to be made of the distinction.
As a starting point – the main distinction that the cases draw in respect to the difference between the two is that Executive directors are both a director and an employee of the company. Non-Executive directors are generally not employees of the company and will not be involved in the full-time management of the company.
Some corporate law commentators suggest that the reason the legislation fails to make a distinction between executive and non-executive directors is that the legislature intended for distinctions to be made on a case-by-case basis.
Such was the case in ASIC v Healey (No 2) (2011). In that case, a board of directors had contravened multiple sections of the Corporations Act 2001 (Cth) in failing to disclose significant matters in their financial reports.
While Middleton J found that each director had breached the section, the penalties imposed varied depending on the level of responsibility attributed to their role. His Honour imposed no penalties on the non-executive directors. However, in the case of the CEO (an executive director) a penalty of $30,000 was imposed. This penalty was deemed appropriate to deter executive directors with high degrees of responsibility from breaching the Corporations Act 2001 (Cth).
As such, the judgment in Healey is indicative of the fact that the status of a director may affect the level of responsibility attributed to them in corporate wrongdoing. Where they are deemed more closely connected to the everyday management of the company, as is the case for executive directors, it may be necessary to impose harsh penalties as a deterrent for future wrongs. It seems that such penalties may be less likely to be imposed on non-executive directors.
One particular area where the Exec/Non-Exec dichotomy comes up is in company constitutions. It is not uncommon for company constitutions to place different obligations, restrictions and processes on directors depending upon whether they are considered to be executive or not. Generally speaking, the Executive Directors will be subject to a higher level of responsibility and obligation.
At Baker Love Lawyers our Commercial Law team understand the legal and legislative framework that company directors must operate. Whether you are an Executive or Non-Executive director and require advice and legal representation, we have the expertise and experience to assist.
