Non-executive director
A board director who is not part of day-to-day management, but who is also not classed as independent — a third category sitting between executive and independent directors.
In plain language
A company's board is not made up of one kind of director. The workbook splits directors into three groups: executive directors, who run the business day to day; independent directors, who have no material tie to the company or its promoters; and non-executive directors, who sit in between.
A non-executive director is not part of management. But that alone does not make them independent — they may still have some connection to the company or its promoter group that an independent director is not allowed to have.
How it works
The workbook's own line: directors "can include independent directors, non-executive directors (who are not part of management but not independent, either), and executive directors."
Board composition rules turn on this split. SEBI requires at least 50% independent directors if the chairman is an executive director, and at least one-third in all other cases. The remuneration committee rule then singles out non-executive directors specifically: all its members must be non-executive, and its chairman must be independent. Since an independent director is also a non-executive director, this rule is really saying the committee can mix independent and merely-non-executive members, but its head must be from the stricter, independent category.
A worked example
A company's 12-member board has an executive chairman. SEBI's 50% rule means at least 6 of the 12 must be independent directors. Say the board has 6 independent directors, 2 executive directors and 4 non-executive directors who are neither.
When this company forms its remuneration committee, every member must come from the non-executive pool — meaning any of the 6 independent directors or the 4 non-executive-but-not-independent ones, but never the 2 executive directors. If the committee has 4 members, its chairman must specifically be one of the 6 independent directors, not one of the other non-executive directors.
Why NISM asks about it
Chapter 7.6.2(i) sets out the three-way director split and the board independence thresholds; 7.6.2(viii) uses the non-executive category again for the remuneration committee. Expect a question distinguishing the three director types, or one testing which committee rule needs "non-executive" versus "independent" members.
Common exam traps
- Non-executive is not a synonym for independent. Every independent director is non-executive, but a non-executive director need not be independent — the workbook creates this as a distinct middle category.
- The remuneration committee needs all-non-executive membership with an independent chairman — two different tests stacked on the same committee, easy to collapse into one.
Where this is taught
Free preparation for NISM Series XVRelated terms
- Agency riskThe risk that a company's management, who control day-to-day decisions, pursue their own interests rather than those of the shareholders who actually own the business.
- Audit committeeThe board sub-committee responsible for reviewing a company's financial statements and nominating its auditors, which SEBI requires to be at least two-thirds independent directors.
- Corporate governanceThe rules, processes and procedures followed in running a company, judged by an analyst against a checklist of board, audit and related-party tests rather than by reputation.
- Remuneration committeeThe board committee that decides the pay of directors and senior management, which SEBI requires to be made up entirely of non-executive directors with an independent director as chairman.
- Nomination committeeThe board committee that appoints independent directors, which the workbook says should ideally consist exclusively of independent directors so that company executives have no role in the appointment.