Difference Between Executive Director and Independent Director

Difference Between Executive Director and Independent Director: The company is an artificial person and is managed by the human beings.

Raju

Difference Between Executive Director and Independent Director

Difference Between Executive Director and Independent Director: The company is an artificial person and is managed by human beings. The human who runs it is known as the Board of Directors. Directors acting collectively are known as the Board. The directors play a very important role in the day-to-day functioning of the company. It is the board, that is responsible for the company’s overall performance.

To attain the objectives prescribed in the Memorandum of Association of the company, the company depends on Board of Directors (collectively) and directors (individually). Directors of a Company are its eyes, ears, brain, hands and other essential limbs.

Independent Director

The Cadbury Committee in 1992, which itself was set up following the corporate scandals involving BCCI, Poly Peck and Maxwell, provided respectability to the concept of independent directors, by focusing on independent directors as a part of the new practices for better governance. Independent directors function as an oversight body in monitoring the performance and should raise red flags whenever suspicion occurs. They are expected to be more aware and question the company on relevant issues in their position as trustees of stakeholders.

The institution of independent directors is a critical instrument for ensuring good corporate governance and it is necessary that the functioning of the institution is critically analysed and proper safeguards are made to ensure efficacy.

Companies Act 2013 mandates the appointment of independent directors by listed companies and other classes of companies. It also prescribes other aspects such as maximum tenure of independent directors, separate meetings of independent directors, tenure, their qualifications, liability, appointment, remuneration, etc. The Central Government has exempted section 8 companies from the requirement of appointment of Independent Director.

Executive Director

An executive director holds a position on the executive board. They have “executive responsibility” for running the company’s business. They will typically be elected by employees and shareholders and might be an employee, officer or stakeholder in the company. Other directors may be representatives of, for example, an institutional investor or a union.

Difference Between Executive Director and Independent Director

EXECUTIVE DIRECTORINDEPENDENT DIRECTOR
This is an employee of companyThey cannot become chairman of various committees of the board
ESOPs can be granted to such directorESOPs cannot be granted to such director
They are liable to retire by rotationThey are not liable to retire by rotation
They are appointed for one year and can be reappointedThey can be appointed for 5 years at a time and can serve 2 consecutive terms.
Listed: 1/3rd of total directors must be independent directors
Unlisted: at least 2 directors should be independent directors
Chairman of committees of board has to be independent director
They can have monetary relationship with the companyThey cannot have any monetary relationship with the company
No Need to hold a separate meeting of executive directors onlyAt least one meeting must be held of Independent directors only
No minimum number of executive directors required to be appointedListed: 1/3rd of total director must be independent directors
Unlisted: at least 2 directors should be independent directors
Every Company is required to appoint executive directorsOnly companies fulfilling certain parameters are required to appoint independent directors

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Raju

Raju Choudhary is a Product Manager, passionate about technology and innovation. Having a background of commerce, he also loves to lead people with his easy going interaction. Loves travelling, reading and sports which make him upto date always.

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