News & Insights

Understanding the Function of Non-Executive Directors in Corporate Governance

Cyprus companies are governed primarily by the Companies Law, Cap. 113, which does not explicitly distinguish between executive and non-executive directors. However, the Corporate Governance Code recognizes the importance of non-executive directors and sets out detailed provisions for their appointment. Thus, the main bodies responsible for overseeing the implementation of the Code and its enforcement are the Cyprus Stock Exchange (CSE) and the Cyprus Securities and Exchange Commission (CYSEC).

The aim of the Code is to strengthen the monitoring role of the Board of Directors, to protect small shareholders, to adopt greater transparency and to provide timely information, as well as to sufficiently safeguard the independence of the Board of Directors in its decision-making. The Code is voluntary for the listed companies.

Distinction

Non-executive directors (NEDs) play a pivotal role in the governance structures of companies in Cyprus. Though not involved in day-to-day management, they provide independent oversight and strategic guidance.

A Non- Executive Director is neither an employee of the company nor a holder of an executive office. Typically, an NED devotes only part of their time to the affairs of the company, whereas an Executive Director is a full-time employee engaged in the daily management of the company and its business.

Duties of Directors under Cap. 113

Under Cap. 113 and common law principles, all directors owe the company the following duties:

• They must exercise reasonable care and skill.
• The standard of care, skill and diligence is commonly known as the “objective” or “benchmark” test of what “the reasonable man” might expect of a director in the particular circumstances. If that director has a particular skill or level of expertise then, he is required to exercise that skill in addition to the “benchmark” test.
• They must act in good faith, in the best interests of the company.
• They must not place themselves in a position of conflict. If there is a conflict between their interests or duties and the interests of the company in any transaction, they must disclose the said interest to the Board.
• Duty to exercise independent judgment, particularly crucial for NEDs, who are expected to provide objective oversight.
• Statutory Duties

Notably, courts have recognized that the degree of care and diligence expected from NEDs may be somewhat different due to their non-involvement in daily management, but this does not diminish their liability for negligence or breach of duty.

 Criteria under the Corporate Governance Code

According to the Corporate Governance Code, non-executive directors must be independent individuals capable of exercising objective and unbiased judgements and evaluations. To qualify as independent non-executive director must meet the following minimum criteria:

(a) He should not have close family or business ties (up to first degree) or have an employer-employee relationship with the executive members of the Board of Directors or with a shareholder who controls directly or indirectly the majority of the Company’s share capital or voting rights, which could (significantly) affect their independent and unbiased judgment;

(b) He should not have any other material relationship with the Company which, by its nature, may affect his independent and unbiased judgment and, in particular, he should not be a supplier of goods or a provider of services, which, by their nature, (significantly) affect his independent and unbiased judgment, nor should he be a member of the Company, which is an advisor to the said Company. Additionally Directors shall not be considered independent if they personally, or their spouses, their children who are minors, their parents as well as companies in which they hold a percentage of over 20% of their share Capital and in which they exercise material control, have loans or Guarantees of a total amount which exceeds €500.000;

(c) He should not be an Executive Managing Director or Executive member of the Board of Directors of a directly or indirectly associated or subsidiary company presently or during the past 12 months;

(d) He should not have been an employee of the Company or of the Group within the last 5 years;

(e) He should not have nor had within the last 3 years any material business relation with the Company, either directly, or as a partner, shareholder, Director or Senior Employee of an Organization which has a business relationship with the Company, which could, by its nature, affect his independent and unbiased judgment;

(f) He should not have any business relationship or close family ties with any of the company’s advisers;

(g) He should not hold cross-directorships or has significant links with other Directors through involvement in other companies or bodies;

(h) He should not serve on the Board of Directors for more than 9 years continuously or not.

The objective is to prevent the non-executive directors from being swayed and influenced in any way when it comes to their judgements.

Responsibilities of Non-Executive Directors

They are not involved in the day-to-day management of the company but have essential supervisory responsibilities. Their responsibilities include:

• Offering an independent perspective on the company’s governance and strategic direction.
• Constructively challenging executive decisions and policies.
• Monitoring the performance of executive directors.
• Must act in good faith and in the best interest of the company.
• Avoiding and disclosing any conflicts of interest.
• Promoting the long-term success of the company;
• Exercise independent/ unbiased judgement;
• Exercise reasonable care, skill and diligence;
• Participating in board committees such as nomination, audit, and remuneration, thereby enhancing transparency and accountability.

The value of a non-executive director lies in their independence from management, generally assessed based on the lack of financial ties with the company, no recent employment in the company and no close relationships with executive directors.

For further information on this topic please contact AMG MYLONAS & ASSOCIATES LLC by telephone +357 25101080 or via email [email protected]

The information provided by Mylonas Law is for general informational purposes only. It does not constitute or should not be read as a legal or tax advice. You should not act or refrain from acting based on any information provided above without obtaining legal or other professional advice. No responsibility can be accepted by the authors or the publishers for any loss occasioned by acting or refraining from acting on the basis of this publication.