While it is common for the words chief executive officer, executive director and managing director to be used as synonyms, at law, they are completely different offices with different legal ramifications.
In this article, we set out to briefly discuss the positions and their ramifications according to the Companies Act, 2017.
At law, the business of a company shall be managed by or under the direction or supervision of a board of directors.
Two options are thus clear, the board of directors may decide to manage the business of the company on its own or entrust the management function to specialized staff. If the management function is so entrusted, the board of directors is obliged to provide direction and supervision to the specialized staff.
The word chief executive officer or CEO at law therefore means the person who is responsible, under the immediate authority of the board, for the day to day management of the affairs of the company. Strictly speaking, this person is not part of the board. A chief financial officer is another example of officers belonging to this management cadre. All persons holding management position are known as executive officers of the company.
Legally, the chief executive officer or other executive officers are not members of the board. They are answerable to the board. It is possible to appoint a CEO as part of the board, but in this case, the person occupies two independent positions with distinct, and sometimes conflicting obligations. A managing director or MD on the other hand, refers to an individual holding a board position, and not just a management position, who is entrusted with or heading the team of directors entrusted with the day to day management of a company. He is a director in charge of day to day management of the company.
Recall, we have said a board can decide to manage the company itself or entrust it to specialized staff and only provide oversight. Where the board decides to manage the company itself, it may appoint a number among them to be involved in the day-to-day management of a company. Any director so appointed is known as an executive director or ED. If there are a number of executive directors, the head of this team is the person properly described as managing director. An executive director is not subject to the retirement by rotation policy of directors. Unless specified otherwise in its articles, an executive director’s appointment terminates automatically if the executive director ceases for any reason to be a director. This means a person cannot occupy the position of executive director or managing director without first being appointed as a director of a company.
Those directors not involved in the day to day management of the company, but providing supervision and oversight in common with others are known as non-executive directors. The company secretary is ultimately responsible for providing guidance as to the duties, responsibilities and powers the distinct governance structures of management and board of directors in a company.
So next time you encounter the term chief executive officer, executive director and managing director, or if these terms are used in your organization, it is important to ensure that their legal effect is appreciated and aligned with the provisions of the law, if that is not the case yet.
Client Legal Alert – Equitas Legal Practitioners@2020
*This scholarly article is a general guide and does not contain definitive legal advice. Readers considering taking action on any of the issues discussed should speak to their legal advisors before taking any such action. Equitas disclaims any liability whatsoever arising from acting on this article. Action. Equitas disclaims any liability whatsoever arising from acting on this article.