I've been pondering a seemingly straightforward term of late, in an attempt to resolve what appears to be an anomaly in our understanding of directors and how they work. The term is 'executive director'. It refers to a company director who is also a company executive. While seemingly helpful as a qualifier, I wonder whether the widespread usage of the term has led many, unknowingly, to a point of confusion and of unrealistic expectation.
The very act of qualifying the term director introduces—subconsciously at least—the possibility that certain directors should, could or do act differently from other directors. Independent director; executive director; non-executive director; inside director; outside director; and, lead director, amongst others are all part of the lexicon. Yet in most countries the statute is quite clear: there is only one category of director. Consequently, all directors are expected to act in the same manner as they fulfil certain duties, in the eyes of the law at least. But do they, and importantly, can they?
The role of 'executive director' seems to be quite troublesome. 'Executive' and 'director' are two distinct roles, yet the term conflates the distinct contributions into a new, third, role: someone who is a director and an executive concurrently. Is it possible to perform both roles concurrently and fulfil them dutifully?
Directorial appointments are full-time commitments: one can't be a director some of the time. Responsibility is not absolved just because a director is on holiday or working in another context. An executive who is also a director is required to fulfil their directorial duties at all times. They don't 'stop' being a director when they leave the boardroom and return to their executive role. Similarly, in the boardroom, how might a director who is also an executive make a critical and objective assessment of management performance? I've seen this problem many times in the boardroom. Executive directors are blatantly conflicted, yet many expect to make decisions on their own proposals!
I've concluded that the term executive director is an unhelpful misnomer.
If boards are genuinely committed to acting in the best interests of the company, a resolution is required. One option might be to exclude executive directors from every formal decision made by the board. Another perhaps more tenable option might be to ensure that non-executive directors make up the majority of directors, so that self-interested executive directors cannot capture the decision-making processes. A third option might be to adopt a policy at the shareholder level that executives will not be appointed as directors.
Do you have a view on this? I'd love to hear from experienced directors, chairmen and researchers, to learn about the ramifications of which of these options, and to hear whether any of them (or any other options not mentioned) might lead to higher quality decisions in the boardroom and better business performance.
Thoughts on corporate purpose, strategy and governance; our place in the world; and, other things that catch my attention.