There are two main kinds of people involved in a company’s business: the shareholders and the directors.
As we’ve seen in our guide to share capital, each shareholder owns a part of the company, and has a certain – sometimes limited – say in how the company is run. However, the main operations of a company are carried out by its directors, acting collectively as a board or a committee, and sometimes as individuals with particular specialisms.
In a nutshell, these duties dictate that the directors must be loyal to the company and act in its best interest, even if this conflicts with their own interests. In addition, directors have certain legal duties – to make filings at Companies House on the company’s behalf and to prepare accounts for example.
Because the title of ‘director’ carries a certain kudos, it’s often thrown around when talking about a company’s management. Certain roles may be given titles like ‘assistant director’ or ‘associate director’. While these handles can be useful in promotion or recruitment terms, things can get tricky if a company’s actions are challenged. It’s the directors who are on the hook when things go wrong, so you need to be careful.
In this guide, we take a look at the different types of directors, how you can tell them apart, how to choose your mix of directors if you’re a start-up or fast-growing business, and what you need to look out for when choosing people to make decisions for your business.
- Types of director in practical terms
- Executive directors
- Non-executive directors
- Directors’ duties
- How to choose your types of directors if you’re a start-up or fast-growing company
- Legal definitions of directors and why this matters to you
Types of director in practical terms
When a company is set up, it’s the company’s shareholders who decide who the directors are and what they’ll do. After that, either the shareholders or the directors may have the right to appoint directors.
Directors don’t have to be full-time employees, and they may not even be company employees at all.
Sometimes, directors have particular areas of expertise or roles. For example, a company may have a chief executive, a finance director, a managing director and so on. These most senior directors or officers of a company are often referred to as the ‘C-suite’, and this is because they often are given titles that begin with ‘Chief’, such as the Chief Marketing Officer, Chief Finance Officer, and so on.
While in most smaller companies, all directors have contracts of employment (or service contracts), in some companies, particularly larger and public companies, the shareholders may decide to appoint non-executive or independent directors who are not employees.
An executive director is a person responsible for day-to-day management of the company as well as its strategy. Executive directors usually sit as the board of directors.
An executive director will usually be a company employee as well as a director. This means that in addition to their directors’ duties, they’ll have duties to the company as part of their employment contract.
In a practical sense, this means that executive directors must:
- keep a degree of independence from their management job when making strategic decisions as a director
- be aware that their day job may sometimes cause a conflict with their strategic role
- use their insider knowledge of the company to help the board as a whole make good decisions
For these reasons, when choosing an executive director, you should bear in mind their qualities as individuals as well as their technical abilities and try to choose people who will bring different skills to the mix.
The managing director or chief executive is normally an executive director who’s been appointed to run the company and follow the strategy determined by the board and the shareholders.
Non-executive directors have the same legal duties towards the company as executive directors, but because they generally don’t get involved in operations, they have more of an oversight and strategic role.
The shareholders often choose to appoint non-executive directors to keep an eye on how the directors are performing, and to give comfort to the outside world (and people like investors) that the company is being run properly.
Non-executive directors are common in public companies, where a large proportion of the shareholders are members of the public who have little or no influence over the business.
They are not normally employees but receive a fee for acting as a director under a director’s service contract.
In choosing a non-executive director, ideally you’d choose someone independent of the company who:
- has skills and experience valuable to the company
- isn’t a supplier or customer
- is prepared to become knowledgeable about the company’s activities so that they can make informed and objective decisions
- doesn’t advise the company in some other capacity, such as an accountant
- doesn’t have any conflicts of interest with the company or the other directors, like being a family member or running a similar company themselves
- is on a fixed-term contract so can be removed easily if necessary
- understands that they don’t have a management role
Non-executives can be really helpful when running a company as they bring an outsiders view, particularly if they are truly independent.
Sometimes directors have a non-executive seat on the board because they are representing one of the principal shareholders such as an investor. These are known as ‘nominee directors’. It’s obviously important in such a case that that director puts the interests of their sponsor or employer to one side when making decisions on behalf of the company of which they are a nominee director.
The Companies Act 2006 sets out some general duties that the directors owe to their company:
- to act within the powers given to a director
- to promote the success of their company
- to exercise independent judgment in their decision-making
- to exercise reasonable care, skill and diligence
- to avoid conflicts of interest when acting or making decisions as a director
- the duty not to accept benefits from third parties and
- to declare any interest they have in a proposed transaction or arrangement that the company is aware of or considering.
While non-executive directors have the same duties as executive directors, they are held to a slightly higher standard in law because of their limited participation in management and the running of the company.
The chairman or chairwoman of the board is the person who leads the board of directors, sets the agenda, makes sure that the directors are given sufficient information to make informed decisions, and oversees the decision-making procedure. During meetings, their job is to ensure there’s a proper debate and that all voices are heard.
Under the articles of a company, the chair often has a casting vote in the case of a hung decision. In larger and listed companies, the chair ideally shouldn’t also be the chief executive, because of the potential for a conflict of interest.
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How to choose your types of directors if you’re a start-up or fast-growing company
If you’re a start-up or high growth business, particularly if your ultimate goal is to seek external funding or go public via an IPO, you should ideally choose a mix of directors to sit on the board. This is because executive, non-executive and truly independent non-executive directors bring different skills and perspectives to the mix and lend credibility to your business.
A good balance of directors will not only help your decision-making processes, it will demonstrate to third parties that you’re serious about your business’s growth.
The benefits of having independent non-executive directors is that:
- they will be able to give you objective advice that isn’t tainted with an insider’s perspective
- they can act as a critical friend and give you impartial advice
- they often bring specialist knowledge from other areas of business and different sectors
- they may help you innovate
- if you’re short of cash to bring in particular skillsets, they may be able to compensate for this in some degree
- they can act as consultants
In these last two respects, sometimes the line between executive and non-executive directors can become a bit blurred, as specialist non-execs can end up helping with management tasks.
Legal definitions of directors and why this matters to you
According to the Companies Act 2006, a statutory director includes any person occupying the position of director, even if they are not called a director in their job title.
When you operate a company, you have to keep a register of the people that are currently appointed as directors. Their details are kept by the company and are available to be inspected by the public. The type of details you need to list will be different depending on whether the director is a person or a company or other legal entity. Some details may be kept private if you’ve elected to do so.
When you first incorporate your company, you need to give details of its first directors to Companies House. After that, every time their role or their details change (for example, the role begins or ends or the director’s residential address details change), you have to notify Companies House again within 14 days of the change.
De jure directors
A ‘de jure’ director is a person that is legally entitled to be a director because they’ve been formally appointed in law as a director or in accordance with the articles of association of the company. A statutory director is therefore a de jure director.
A de jure director is also likely to be registered with the registrar of companies at Companies House.
A de jure director can be validly appointed to a company in a variety of ways:
- if they have been appointed by the members of the company.
- jf they are appointed by the board of directors.
- in some circumstances, if they have been appointed by court order
As long as the person at least 16 years old when the appointment takes effect and they have consented to act as a director of the company, they can be a de jure director.
De facto directors
In contrast to a de jure director, a de facto director hasn’t been properly or legally appointed as a director but does, in fact do things that directors normally are allowed to do, like:
- signing contracts
- telling third-parties or making themselves out to be a director
- taking decisions on behalf of the company
Whether someone is acting as a de facto director will depend what they do and how, but generally they need to be seen to be acting in a senior, decision-making role rather than just being a members of the management team (such as ‘director of communications’).
During their time as a de facto director, the person will owe the company the same general duties as a statutory director.
A shadow director of a company is a person whose directions or instructions are usually followed by the directors of that company.
Having said that, just because the directors act on advice given by a professional adviser doesn’t make them automatically a shadow director. It depends on the degree of influence they have on the company’s operations and conduct and the degree of discretion they have over its affairs.
There is arguably an overlap between the roles of a de facto director and a shadow director – if a person was not formally appointed as a director, but still exercised real influence over a company, they could arguably be both a de facto director and a shadow director.
A shadow director will generally be bound by the statutory duties of a director rather than the general duties set out in law, which includes duties to declare any interest they have in a proposed transaction or arrangement that the company is aware of or considering.
A nominee director is a de jure director that has been appointed to represent a particular party, interest or stakeholder other than the company.
For example, if you’re creating a company joint venture, the shareholders of the JV will each appoint nominee directors to represent them on the board. Appointing nominee directors is a useful way for you, as a JV shareholder, to effectively monitor the strategic direction of the joint venture.
A nominee director will owe the general duties of a director to the company to which it is appointed, so they need to bear in mind the importance of independence from their sponsor in the decision-making process.
An alternate director is someone whose been appointed under the articles to act as director in place of a currently appointed statutory director. This can be for practical reasons such as to make sure there’s a quorum for a board meeting.
If a company wants to allow its directors to be able to appoint alternate directors, it should make sure that the articles allow this. In practice, alternate directors are often approved by the board of directors of the company prior to them being appointed.