The role and types of company director

If you are just looking for an agreement

You may have reached this page looking for a letter related to directors, not information on them. If you do just want a document, Net Lawman offers Director's services.

Introduction

In everyday speech we used several terms to describe directors. This article explains the law and practice of who does what, around the boardroom table.

The starting point is very simple: to the law, a director is a director. What tasks he undertakes and what title he takes are irrelevant to his legal obligations. So fancy titles and different ranks are irrelevant.

We should just point out however, that the title “director” is often applied to someone who is not actually a director in law. This is most common in the marketing function. To avoid challenge, such titles are sometimes mixed with other words, such as “Associate director of marketing”. In our view, the use of such titles is immoral and tells its own story about the company that uses them.

While we are leveling the playing field, we will also mention chairmen/women. If a company has more than one director, the body of directors must appoint one of their number as chairman for each meeting. For no good reason apart from exerting power, the same person tends to put himself forward as de facto chairman for years from that day. However, there is no reason why the directors should not vote at any time for a different one of their number to chair one or more meetings.

In some companies, the directors agree to rotate the chair each year or each month.

It is easy to abuse the position of chairman by monopolising discussion, refusing opposition, suggesting how colleagues should vote, and many more. Sadly, by the time the other directors are determined to take action, the only practical answer is often to remove the chairman as a director rather than simply ask him to stand down as chairman.

So there we have a small number of directors with equal rights and responsibilities before the law.

Duties of directors

Actually directors may not be equal, even in law. Roles and powers may be regulated by the articles of the company. Any who are shareholders will be controlled contractually by a shareholders’ agreement. Any of them may have a contract of employment which gives particular rights or duties.

This is a confusing area. To be as sure as you can be, check the three documents we have just mentioned. If there is a conflict, it is likely that the articles come first. But that may give someone a straight win for a claim of breach of contract. So, for now, let us forget the exceptions and concentrate on basic equality.

The duties of directors are set out in the Companies Act 2006. We do not propose a long essay here. The essence is that every director is jointly responsible with every other, for compliance of the company with all its legal obligations as well as for its functioning in accordance with its articles. Although a company director does not carry the same burden of “utmost good faith” that is borne by a trustee or partner, the effect of the law is similar. A director must always prefer the benefit of the company over a benefit to himself in any situation where there may be a conflict of interest.

Precise roles of directors

It is up to the shareholders to decide what each director shall do for work. A director can be paid or unpaid, full or part time. A director who does not work in the company full time is usually referred to as a “non-executive” director. As you will by now understand, that term too is meaningless in law. A non-exec has exactly the same responsibilities as a full time director. He is responsible for all the decisions of the “board” of directors, unless he has asked the chairman specifically to record his disagreement.

Usually the roles of directors are split by function. There may be a chief executive /managing director, and maybe a finance director, a marketing director, and so on. Exactly what work is done by each is likely to be set out in his employment contract (also called a “service agreement”).

Non-executive directors are most common in public companies. The hope is that a non-exec will provide different expertise, a different view and be less inclined to be subservient to the chairman. By employing a coterie of non-execs, a public company chairman satisfies fear and concern expressed by shareholders and financial journalists on matters such as adherence to good practice, honour not bribery,and respect for the interests of other stakeholders,   Please forgive our cynical opinion that this is never more than a hope. The strongest personality among the directors usually becomes chairman and any director who fails to please will soon leave.

However, if a company really wants some measure of control over a chief executive, they should find non-execs, each of whom:

• is not an employee of the company (he is paid a director’s fee under a service contract which limits his role to that of non-exec director);
• is self employed;
• is not a professional advisor to the company;
• is not a supplier or customer of the company;
• does not have a close family connection with someone working at the company or in the same industry;

Most importantly, the non-exec should be on a fixed term contract for two or three years, so that he cannot easily be disposed off if he dares to disagree.

Related Article:

Read more about: Director's liabilities and insolvency