The Role of an Executive Director

In a previous article we examined the role of additional directors and the value they can bring to a board. Here we look at the appointment and duties of executive directors, who are responsible for the day-to-day management of a company.

Definition of an Executive Director 

Rule 2(k) of The Companies ( Specification of Definitions Details) Rules 2014 defines an executive director as a full-time director as (clause 94 of section 2 of the Act). In general, they are in charge of the day-to-day activities, management and functioning of a company. They are also known as internal directors and may be allocated specific roles and be involved in allocating resources to carry out departmental goals. They may also be responsible for employing new people and overseeing the budget of the company. Executive directors need to be very well organized, should be able to set out the priorities of their work and manage several projects.

Appointment of an Executive Director

As per Section 153 of Companies Act, 2013, any person who wants to be appointed as a director in a company must apply to the central government with the prescribed fees in order to receive a Director Identification Number. Only a person of age twenty-one and above and who has not attained the age of seventy is allowed to be appointed as an executive director under section 196 of the act. However, a person who has attained the age of seventy can still be appointed by passing a special resolution.

In order to be appointed, the appointee must not be an undischarged insolvent or have ever been declared insolvent or found guilty of an offence with more than six months in prison or at any time have stopped making payments to creditors or entered into a composition with them.

Usually, managing directors are appointed through Articles Of Association (AOA) of a company or through a resolution passed by the board of directors in its general meetings. However, executive directors are not appointed in this manner nor is there any specific manner in which an executive director is appointed. The AOA or board of directors may provide for the appointment of executive directors. Where a board appoints an executive director, terms and conditions, remuneration and other such matters should be included in the notice convening the meeting of the board of directors. The terms shall also include the powers and functions of the executive director as the Companies Act does not stipulate the powers and functions of an executive director.

An executive director can be appointed or reappointed for a maximum period of five years by a public or private company and such reappointment cannot be made a year before the tenure ends. Consent should shall also be given by the appointee to hold the position as an executive director of the company.

Part 1 to schedule V of the act mentions the eligibility criteria of an executive director as follows:

  1. They have not been found guilty of any offence under any of the 19 statutory laws and have not received a custodial sentence for any period or a fine exceeding 1000 Rupees.
  2. They have not been detained under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974.
  3. They have attained the age of twenty-one and are below the age of seventy one.
  4. They should be an Indian resident.

Lastly, for the appointment of an executive director, a company must file an e- Form DIR-12 (a public company must file an e- Form MR1) within sixty days of the executive director’s appointment.

The designated director must, in accordance with section 184 of the Act report in Form MBP- 1 their concern or interest in any business, companies, body corporate or other association of persons including any shareholding and this disclosure must be made at the first board meeting. It must also be given at the first board meeting of each fiscal year following that, or at the first board meeting that follows any modification to the disclosures that have previously been made. The executive director’s disclosure should be recorded in the board meeting minutes.

Roles and duties

An executive director plays an important role in a company’s development and expansion while maintaining its financial stability.. Section 166 of the Companies Act provides that a director of a company should act in accordance with the articles of association of the company and as follows:

  1. A director must act in good faith in order to achieve the objects of the company for the benefit for all of its members.
  2. A director must act in the organization’s, its shareholders’, its employees’ and the community’s best interests.
  3. They must use independent judgement and due diligence and reasonable care while exercising their duties.
  4. They should not be involved in situations where they may have a direct or indirect interest which is likely to conflict with the interests of the company.
  5. They must refrain from obtaining or attempting to obtain any unfair benefit for themselves or any of their acquaintances.
  6. A director must not assign their office to any other person.