WHO ARE NON-EXECUTIVE DIRECTORS?
A non-executive director is someone who is not an executive director and is not involved in the day-to-day operations of the firm. He or she is typically active in policymaking and planning. The non-executive directors are responsible for overseeing the executive directors’ and management’s performance. They are usually bound to the same regulatory standards as everyone else.
PROVISION UNDER COMPANIES ACT FOR NON-EXECUTIVE DIRECTOR
The term “Non-Executive Director” is not defined specifically under the Companies Act. It can interpret it by interpreting the term “Executive Director” as a full-time director as defined in clause (94) of section 2 of the act under Rule 2(k) of the Companies Rules 2014. To be more specific, a “Whole Time Director” is defined as follows in section 2 (94) of the Act: “Whole Time Director includes a director in the company’s full-time employment.”
A non-executive director is a director who is not a full-time director, i.e. a director who is not in the company’s full-time function, as defined by the executive director definitions above. As a full-time or temporary appointment, non-executive directors contribute a variety of knowledge, techniques, experience, and connections to the organization.
Because they are not involved in the day-to-day operations of the company and oversee executive actions, such directors are sometimes known as caretakers of the governance process.
RESPONSIBILITIES AND TASKS OF A NON-EXECUTIVE DIRECTOR
Non-executive directors are well-known for not being involved in the day-to-day operations of the organization. As a result, it’s even more critical to know the tasks and responsibilities of a non-executive director, and the responsibilities that come with them.
The board of directors and non-executive directors of a corporation must comprehend and define the function of a non-executive director on the board. They must lay out the obligations that will be assigned to them and the liabilities that will be shared with them.
CRITERIA FOR MAKING PAYMENT TO NON- EXECUTIVE DIRECTORS
The NEDs’ knowledge, recommendations, and suggestions have been extremely beneficial to the company. They spend important time deliberating on strategic and crucial matters during the Company’s Board and Committee meetings, and they provide vital advice, suggestions, and assistance to the company’s management from time to time.
The board of directors and non-executive directors of a company must recognize and define the function of a non-executive director on the board. They must lay out the obligations that will be assigned to them and the liabilities that will be shared with them.
According to Regulation 46 (2) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 Listed Entities must provide information on their website about criteria for making payments to non-executive directors.
Independent directors, and non-executive directors, are entitled to a sitting fee. They may, however, be compensated on a commission basis.
A director may receive payment in the form of a fee for attending meetings of the Board or Committee thereof, or for any other reason as determined by the Board, according to Section 197(5) of the Companies Act, 2013. Similarly, Rule 4 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 states that such a charge cannot exceed Rs 1,00,000/- (One Lakh Rupees) each meeting. While the terms “for attending meetings of the Board or Committee thereof or for any other reason” occur in this sub-section, they suggest that “Sitting fee”. Directors may also be entitled to pay in the form of fees for any other purpose.
Section 197 of the Companies Act of 2013 permits a business to pay remuneration to its NEDs in one of two ways: monthly payments or a proportion of the business’s net earnings, or a combination of the both.
Furthermore, the provision says that a maximum of 1% of the firm’s net earnings can be distributed as payment to its NEDs if the firm has either a managing director or a full-time director or manager. If no managing director, full-time director, or manager is present, a maximum of 3% of net profit can be rewarded. As a result, the Company’s net profit is used to pay the NEDs.
Section 197 of the Companies Act of 2013 allows a company to pay remuneration to its non-executive directors for services rendered if:
a) the services rendered are of a professional nature;
b) The Director, in the judgment of the Nomination and Remuneration Committee, possesses the necessary qualifications to practice the profession.
The Audit Committee and the Board of Directors of the Company, in accordance with Section 188 of the Companies Act, 2013, shall approve the Professional fees to be paid to Non-Executive Director(s), with the agreement of the Shareholders when necessary.
REIMBURSEMENT OF REAL EXPENDITURES
NEDs may also be paid/reimbursed such sums as a set allowance and/or actual as reasonable compensation for travel, boarding, and lodging, and also incidental and/or real out-of-pocket expenditures spent by such member for attending Board/Committee Meetings or for Company work. The role of the Nomination and Remuneration Committee is to assess the remuneration of NEDs.
INDEPENDENT DIRECTORS ARE COMPENSATED
An independent director is not eligible for stock options and may only be compensated in the form of fees and reimbursement of expenses for attending Board or committee meetings, and profit-related commissions up to a certain percentage of net profits in such proportion as may be permissible under applicable law.
As previously stated, non-executive directors, including independent directors, are not involved in the day-to-day management of the organization but are involved in policymaking and planning exercises, so remunerating them in the event of absence or inadequacy of profits is justified and a welcome step.