Vol 5 (2008) - Issue 4

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Role, Powers, Duties and Liabilities of Non-Executive Directors under Irish Law

Introduction

The last number of years has seen significant reform of the corporate governance landscape. In particular the changes brought in by the Irish Company Law Enforcement Act, 2001, and the ensuing increase in examination by the courts of the conduct of directors of insolvent companies in liquidation, have heightened awareness of directors’ duties amongst the business community. This has introduced a greater awareness in all corporate entities – whether in the public, private or state sector – of the need for an enhanced, robust and continual focus on governance, risk management and compliance arrangements.

What has become increasingly clear is that fundamental to good governance is the need for companies to be headed by an effective board of directors which is collectively responsible for the success or failure of the company. The board’s role is to provide entrepreneurial leadership to the company within a framework of prudent and effective controls, enabling risk to be assessed and managed. The board should set the company’s strategic aims; ensuring necessary financial and human resources are in place for the company to meet its objectives; and reviewing management performance. The board should set the company’s values and standards, ensuring that its obligations to shareholders and others are understood and met.

The role of the non-executive director

No distinction is made within the Irish Companies Acts, 1963-2006 (the ‘Companies Acts’) between ‘executive’ and ‘non-executive’ directors. This distinction is one which has arisen principally in corporate governance practice. Essentially, executive directors are directors who have an executive responsibility within the company. Such persons participate in the day‑to‑day management of the company and are usually employed by the company on a full time basis and are in receipt of a salary. As an executive director holds this dual role in the company (director and employee), his or her removal from the company will necessarily involve removal from both positions.

On the other hand, non-executive directors are those who are not involved in the day‑to‑day running of the company. Such persons are not employed in the business and do not report to the CEO/managing director. Essentially, their role is one which is confined to the boardroom. Notwithstanding this, their input into the board decision-making process is invaluable, given their expected impartiality, objectivity and independence. Their role includes contributions in the development of strategy and monitoring management performance and activity. There is no legal obligation for private companies to appoint such directors and many smaller companies would not do so. All companies can, however, benefit from the involvement of such directors. Whether a person is an executive or non‑executive director, he or she has the same powers to manage the business of the company. Non‑executive directors also have the same legal duties and responsibilities to the company as the executive directors. The Company Law Review Group has recommended that there should continue to be no distinction between both of these types of directors.