The Companies Act of 1995 does not mention or specifically recognize non-executive directors (NED’s). This was no mistake, but a clear policy of encouraging all directors to act more responsibly or face consequences.

A main objective of the Companies Act was precisely to improve and strengthen the rather relaxed position that existed under the former Commercial Partnerships Ordinance, under which directors felt quite immune from meaningful scrutiny or liability.

In this scenario, it would have been contradictory to offer careless or lazy directors a way out. Every provision in the Companies Act which sets out duties on directors was made to apply equally to all directors, by whatever name they may be described.

Not a part-time occupation

One often hears the suggestion that non-executive directors, especially of relatively small and unlisted companies, need only dedicate a couple of hours intermittently to fulfil their duties. They believe they mainly need to participate at board meetings and do little else besides. The rest they can leave for the so-called executive directors who would be more involved in the company’s daily management.

The boards of some companies are often found to be composed entirely of non-executive directors. Indeed, some NED’s may wrongly consider themselves as part-time directors, distinguishing themselves from the executive directors who would presumably be deemed to pursue their obligations on a fulltime basis.

The 1995 Act does not recognise the existence of part time or fulltime directors. One remains a director in the morning and at nighttime, during board meetings and outside such meetings. Attending board meetings is just one aspect of a company director’s responsibilities, not the only one. The post of non-executive director is not an intermittent or temporary one; nor is it a post of minimum effort. 

The company secretary has to act like a bridge

Non-executive directors should not run away with the idea that having duly attended a board meeting, their responsibility stops there. They remain directors even between board meetings, albeit with a lower level of responsibility than the other directors, and they might still have to accept a measure of responsibility to follow up, retain an interest in and to supervise the company’s affairs and whatever is going on from one meeting to the next.

There is no doubting the benefits and usefulness of having independent directors who are not totally immersed in a company’s management on a daily basis and are able to contribute important knowledge and experience to the board. Unfortunately, it does happen that some independent directors might effectively contribute little or nothing due to their lack of time, attention or competence.

The board secretary

It is probably correct to say that non-executive directors depend on the company secretary more than the more engaged directors. The latter will know most of what is going on within a company. By their very nature, NED’s would know much less especially if their active directorship were limited to attending periodical board meetings.

Unless the chairperson or the other directors have already done so, the board secretary should step in and bring to the attention of members significant events or matters happening between meetings. The NED needs to be occasionally or regularly updated and kept abreast of significant and non-ordinary developments, whereas the other more executive directors would be expected to know them thanks to their greater daily role in the company’s management.

The company secretary has to act like a bridge and reduce this asymmetry of information. Accordingly, the company secretary is expected to use his judgement and keep directors suitably informed of significant developments affecting the company and assist them in performing their duties efficiently during meetings and outside them.

Listed and regulated companies

The regulatory situation is different with regard to listed and to specially regulated companies, like banking and insurance companies, where the appointment of NED’s is more of a requirement than an option. Their presence, competence and contributions are certainly beneficial.

Regulated companies have special rules to regulate the appointment of NED’s, their conduct and responsibilities; the rules and the responsibilities they give rise to are considerable and their performance would be subject to monitoring and appraisal.

Dr David Fabri served as Head of the Department of Commercial Law at the University of Malta and still lectures on company and co-operatives law at the University of Malta. Following his publication Studies in Financial Services Law, he is currently finalizing his second publication Studies in Maltese Company Law (Including Co-operatives) due this coming September.