Types of Directors (1)– Executive and Non-Executive Directors

Types of Directors (1)– Executive and Non-Executive Directors

 

If you have been following this column, you would have realised that we have been focusing on the directors for sometime now. In the coming weeks, we will look at the different kinds of directors under Ghanaian law. 

 

But first, let us remind ourselves of some fundamental points about directors under Ghanaian law. According to the Companies Act, 2019 (Act 992),  a director refers to a person appointed to direct and administer the business of the company. The law is not only concerned about those who are formally and properly appointed as directors. The law seems to also be concerned with those who are not properly appointed as directors and yet for one reason or the other either hold themselves out as directors or allow themselves to be held out as directors. Remember as well that the law’s main concern is to find those who “direct and administer” the company. As a result, the law also ropes in persons who “control” the duly appointed directors. These categories of persons are referred to as shadow directors. As the name suggests, we rarely see these persons but often they are lurking in the shadows; and are the reason the company would move in one direction and not the other. The law also makes it clear that a director is simply a director – irrespective of the descriptions that may attach to the person’s name.

 

It is also important to bear in mind that as a general rule, there is no obligation on a director to own shares in the company – even though some companies insist that directors own some shares in the company. The insistence on share ownership springs from the fact that it makes the directors part of the company itself and ensures that they take decisions that are in the best interest of the company. It is important to note that the office of a director is personal and attaches personal liabilities to a person. As a result, a person cannot assign his office to any other person. For example a father assigning his director role to his son is not acceptable as one cannot appoint a person as a director in a will or any testamentary document. 

 

As the title shows, this piece looks at the various types of directors under Ghanaian law, we will start with Executive and Non-Executive Directors. What does it mean for a person to be a non-executive director? What does it mean for a person to be an executive director? Do the distinctions make any difference in terms of rights, duties and liability?

 

For starters, an executive director is the director who holds any other office or place of profit in the company (other than the office of an auditor). In other words, the executive director is a director who also acts as an employee of the company. The phrase “office or place of profit” means that the director in question is being paid by way of salary, commission, share of profits, participation in pension and retirement schemes, or in any other means that the directors may determine. Executive directors, in large numbers, are often found in small companies where the directors share among themselves the existing  roles in addition to the office as directors. For the executive director, it is important to note that his office comes to an end when his role as a director comes to an end and vise-versa. 

 

The non-executive director is the opposite of the executive director. In some other literature and jurisdictions, they are referred to as the independent directors (even though this term is very doubtful in cases where the constitution of the company requires that directors must also be shareholders). In any event, non-executive directors are independent to the extent that they are not involved in the day to day running of the company. In other words, they do not devote all of their time to the business activity of the company. Or to bring the point home, we can say they are “part-timers”. They have other fish to fry elsewhere. Further, they do not hold positions of profit in the company. They are simply directors.

 

The very nature of the distinction between executive and non-executive directors have led some to conclude that the liability of an executive directors is different from those of non-executive directors. This thinking comes from the point of view that part time directors cannot share the same responsibility as full time directors.  This view, archaic as it is, is supported by commentaries such as the sixth edition of Gower’s Principles of Modern Company Law by Paul L. Davies. In there, P.L Davis makes a statement to the effect that “(non-executive) directors are expected to do little or nothing other than to attend a reasonable number of board meetings and, perhaps, some of the committees that the board may establish. As such they will be modestly rewarded by directors’ fees resolved upon by the company in general meeting“. 

 

Well, newsflash, the validity of the view that the “non-executive director” can drag his feet about lazily and not bear any liability is of dubious validity. In the English case of Dorchester Finance Co Ltd v Stebbing, [1989] B.C.L.C. 498. the nonexecutive directors were held to be liable on the same basis as the executive directors and it was held that the scope of the duty of skill of a nonexecutive director should be determined subjectively by reference to that director’s own skill and experience and an duty of care should be determined objectively by reference to the standard expected of the ordinary reasonable man. According to Foster J: “For a chartered accountant and an experienced accountant to put forward the proposition that a non-executive director has no duties to perform I find quite alarming.” In Lexi Holdings (in admin) v Luqman [2009] EWCA Civ 117, the English Court of Appeal made the power that non-executive directors cannot rely on their inactive participation in the company to avoid liability. Finally, in the Hong Kong case of Moulin Global Eyecare Holdings Ltd (in liquidation) v Olivia Lee Sin Mei [2019] HKCFI 1715, a non-executive director was found liable for losses incurred by the company as a result of the non-executive director’s inability to exercise care and skill in the performance of his functions. So to the non-executive director : here is what you need to know: the law does not draw a distinction between the executive director and the non-executive director for the purposes of liability.