A company is a legal entity. This means that, like a human being, it can own property and enter in to contracts. However, as it is an artificial person, it needs real people to represent it and to manage it. The people who are appointed to do this, usually the senior management, are the directors of the company.
It is the directors’ job to manage the day to day running of the business of the company. Directors are answerable to, and may be directed by, the shareholders of the company.
When a company is incorporated, its first directors are appointed as part of the incorporation process. They are chosen by the first shareholders of the company. Where a director is appointed after incorporation, this a majority shareholder decision (in the absence of any provision in the company’s articles stating otherwise). In many companies’ articles of association, it is normal to have a provision providing that the existing directors may appoint further directors of the company.
Directors are often categorised as either executive directors or non-executive directors. Broadly, an executive director will spend the whole of their working time acting on behalf of the company, usually as an employee, and their directorship will be their main source of income. A non-executive director will generally spend less of their time in their role and will be paid a smaller director’s fee and not be an employee. Often, executive directors are in charge of the day to day management of a certain aspect of the company and have job titles relating to this: “managing director”, “finance director”, “operations director”, etc. A non-executive director will have a less hands on role than an executive director. The role of a non-executive director could be to bring their specific sector expertise to the company, perhaps fulfilling an oversight role, or working with other non-executive directors to keep the board independent and acting in the company’s interests (rather than acting in the interests of the executive directors or a particular shareholder). In many private companies, especially smaller owner managed companies, it is not uncommon to have no non-executive directors and instead the major shareholders will be the directors. Here, the same person will have two separate roles – that of director, acting in managing the company, and that of shareholder, benefiting from dividends paid out of the profits of the company.
The articles of association of some companies permit directors to appoint “alternate directors” to act in their place and attend board meetings when they are unavailable. If companies wish to make use of alternate directors, their articles of association must include provision for this. The ability to appoint alternate directors is very useful when a board meeting needs to happen but one or more directors, required to make a quorum, are unavailable.
Currently, companies themselves may be appointed as directors of other companies as long as there is one human director of every company. However, the law is changing so that companies may no longer be appointed as directors. A date is not fixed for when this change will come into force. When it does, a company that is a director will cease to hold that office after one year. In addition, companies will no longer be able to appoint any new corporate directors. The government will have the power to make exceptions to this general rule.
Above, we have considered directors that have been validly appointed. If someone acts as a director but they were never validly appointed, they are called a “de facto” director. The effect of this is that someone holding that position will count as a director in many of the same situations as a validly appointed director. For example, they will owe the company the same duties as validly appointed directors and will count as a director for the purpose of liability imposed on a director.
Sometimes, the directors of a company will be accustomed to act on the instructions or directions of another person who has not been appointed as a director. Such a person could be found to be a “shadow director” by the courts. The consequences of being a shadow director are that many provisions of law relating to the duties and liability of directors will apply to someone found to be one. Potential shadow directors could be controlling shareholders who give directions to the board of directors as to what to do (even if they take no part in the management of the company themselves). The liabilities of directors, including shadow directors, are considered in our related article.
For further help or advice, please contact Jonathan Oxley
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.