The non-executive director
The Companies Act 1995 provides that the term director “includes any person occupying the position of director of a company by whatever name a director may be called carrying out substantially the same functions in relation to the direction of the company as those carried out by a director”.
Under Maltese law, no distinction is made between the different types of directors who may sit on a company board. This means that though in practice, a company may have different types of directors, their duties and liabilities at law are the same. This is the case not only under the Companies Act but also under all other laws that impose obligations on company directors such as health and safety, VAT, employment and anti-money laundering laws and rules.
It is the directors of a company who are responsible to promote the well-being of a company and who are responsible for the general governance of the company and its proper administration and management; and the general supervision of its affairs.
A distinction between the different types of directors who should sit on a company’s board is made in the Code of Principles of Good Corporate Governance, which recommends that “the board should be composed of executive and non-executive directors, including independent non-executives”.
Executive directors are those employed within the company and also appointed as directors while non-executive directors have no responsibilities in relation to the day-to-day running of the company’s business. The Code of Principles in Malta further assists non-executive directors to better understand their role as it provides that: “Non-executive directors are expected to take an active role in: constructively challenging and help developing proposals on strategy; monitoring the reporting of performance; scrutinising the performance of management in meeting agreed goals and objectives; and satisfying themselves on the integrity and financial information and that financial controls and risk management systems are well established.”
Shareholders who have the right to appoint directors should ensure that the board of directors of their company is composed of people who have a range of skills, competence, knowledge, experience and approach to ensure appropriate discussions at board level and to allow the board to discharge its duties effectively.
Shareholders should ensure that directors have a proper understanding and competence to deal with current and emerging issues of the company’s business and that each director enjoys a good reputation.
Non-executive directors should be appointed through a formal process. Once a non-executive director is identified, a formal letter of appointment between the company and the director should be entered into to regulate the relationship between the same. It is also useful to provide the non-executive director with an induction session to the business of the company in order to ensure that a non-executive director can contribute as early as possible to board discussions.
The Code of Principles recommends that an independent non-executive director is appointed as chairman of the board. This gives rise to a separation between the role of chairman of the board and the chief executive of the company while allowing the chairman to focus on creating a more unified board. This should lead to a more effective board. A non-executive director acting as chairman is more likely to ensure that the diversity of the team is of benefit to the company through an inclusive approach, which protects healthy discussion during board meetings. This should promote openness and trust among all directors.
While at law directors have the same duties and liabilities, from a corporate governance perspective non-executive directors have a greater role to play to ensure that a board functions as a unitary board, taking decisions in the best interest of the company.
This enhances the need for non-executive directors to limit the number of mandates they hold so that they are able to effectively contribute to the work of every board on which they sit.
Dr Sciberras is a senior associate at Ganado & Associates Advocates and heads the corporate governance services team.