I’m sure most of you will have heard of ‘company directors’. In fact, as a founder, you probably are one! But what does it actually mean to be a director? What are non-exec directors and how do they fit in? (Are they any different?) What about advisers? Do I need to worry about those ‘fiduciary duties’ that my lawyer keeps talking about?
I’ll try to shed some light on exactly what it means to be a director and the duties and responsibilities that go along with such a post…
(Nb This article is short and pragmatic and should not be relied upon as formal legal advice. Please always obtain advice based on your specific circumstances.)
Who and what is a director?
1. How does a director fit into the company structure?
The typical set up of a private limited company is that you have the shareholders at the top who own the business, then you have the directors who manage the business, and then you have employees and contractors who work for/with the business. Overlap between these categories is very common, particularly at startup level!
Directors are appointed by the company and, by consenting to such appointment, acknowledge that they will be subject to a range of directors’ duties imposed by law. This is what makes the role more than just a title and what you need to be aware of when you take up such a role (see below for more detail).
2. Types of directors?
The two obvious types of director that spring to mind are executive and non-executive directors. Although these may be viewed differently to the outside world (or even within your business), legally speaking there is no difference between the two. The duties we talk about below will apply whether you are a full-time CEO of the business or a part-time, non-exec director.
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The other types of director that can exist are less well known and harder to spot – these are individuals who aren’t formally appointed to the board of directors but who, for all intents and purposes, act as and appear to be a director. There are two types to watch out for:
De facto directors – if you look and smell like a director, you will be deemed to be one. Are you part of the corporate governance system of the company? Have you assumed the status and functions of a director so as to make yourself responsible as if you were a director? If so, you may well be deemed a director.
Shadow directors – this is anyone in accordance with whose instructions the directors are accustomed to act, such as someone sitting behind the scenes who influences directors’ decisions and effectively controls them (note, however, that just acting on someone’s advice given in a professional capacity won’t fall under this).
The point here is that even if you haven’t been officially appointed a director of the company, you could still be deemed to be one and, therefore, could also be held accountable as a director in the event that things go wrong.
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3. What about my advisory board?
Typically, the members of your advisory board will be just that – advisers (ie and not directors). They are often industry experts who have offered to help you out as a favour, or perhaps agreed to be on your website as a sign of support. (Obviously, an adviser could be a director if they are appointed such by the company or are deemed such by acting as a shadow or de facto director – see above.)
4. And board observers?
These are individuals who are invited to attend board meetings of the company but who attend purely as ‘observers’ and are not entitled to vote on decisions of the board or count towards the quorum of a meeting.
So, what does a director do?
Management and decision making. Generally speaking, the directors of a company are responsible for (among others):
- The management and administration of the company – including things like keeping up to date with Companies House filings, producing annual accounts, etc
- Monitoring progress towards achieving objectives
- Appointing senior management
- Accounting for the company’s activities to any relevant parties
Directors normally take decisions in one of two ways: (i) during board meetings which are convened in accordance with the company’s Articles of Association, or (ii) by unanimous decision via the signing by all directors of a written resolution.
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Deadlock. It’s worth bearing in mind what would happen if, for example, you have two directors on the board and they vote differently on matters raised at a board meeting. How do you resolve the deadlock? Below are a couple of practical options for resolving/avoiding a deadlock (these should be drafted into your company’s constitutional documents):
a. Granting a casting vote to the chairman of the board;
b. Ensuring you have an odd number of directors on your board; or
c. Agreeing to refer deadlocked matters to an independent third party whose decision will be binding (just note there will be added time and cost involved with this).
Tell me more about those “Directors’ Duties”…
The Companies Act 2006 has codified seven duties which a director owes to its company. In summary, they are as follows:
- To promote the success of the company;
- To act within one’s powers;
- To exercise independent judgment;
- To exercise reasonable care, skill and diligence;
- To avoid conflicts of interest;
- Not to accept benefits from third parties; and
- To declare an interest in a proposed transaction or arrangement.
Nb Emphasis added to show which I consider to be the main ones to look out for (although all are obviously very important!)
The key point here is to remember that every decision you make as a director needs to be made bearing these seven duties in mind, or else you can be disqualified as a director.
For example, if you’re approving the sale of the company to a third party, you must consider all the facts and agree that the sale would be in the best interests of the company and would promote the success of the company as a whole, ie you can’t be thinking on a selfish level that a sale of the company would be a good idea as it could benefit you personally!
Liability for breach of duty
What can happen to you if you breach one of these duties?
- Personal liability (fines)
- Criminal sanctions
Any tips on how I can protect myself?
- Know what your duties and responsibilities are
- Get D&O (Directors and Officers) insurance
- Talk to your lawyers!
For further information or to answer any questions you may have on this, please drop me a line at email@example.com!