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.
In everyday business use, the title “director” is often given to someone who is just in a position of management. Sometimes a title is mixed with other words as well, such as in “Associate Director”.
There is a difference in law between someone who holds a directorship of a company, and someone who is simply called a director. Someone who is a director in law has very specific legal obligations regardless of what role he or she plays in the day to day running of the business.
While we are leveling the playing field, we will also mention about chairmen (whether male or female).
If a company has more than one director, then the body of directors must appoint one of their number as a chairman for each directors' meeting.
The same person tends to put himself or herself forward as de facto chairman for years, yet 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 other words, in law, the chairman is simply the director who chairs the meetings of the directors, not the leader of the company.
In some companies, the directors agree to rotate the chair each year or each month.
In practice, it is easy to abuse the position of chairman by, for example, monopolising discussion, refusing opposition or suggesting how colleagues should vote. The chairman is often a former managing director or CEO, who remains a large shareholder but who works little day to day. But that doesn't have to be the case. In law (by default), every director has equal rights and responsibilities.
It isn't quite true to say that all directors are equal all the time.
Roles and powers may be regulated by the articles of association of the company. Any directors who are also shareholders may also be controlled contractually by a shareholders’ agreement. Any director may have a contract of employment that gives particular rights or duties.
This is a confusing area when you are trying to ascertain who can do what. 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 employment 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. The essence is that every director is jointly responsible with every other, for compliance of the company with all its legal obligations (such as filing documents) 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. This can be done by clearly distinguishing between the role of the director, and other roles, for example, as a shareholder, and making clear what duties the director has in his service agreement or employment contract.
It is up to the shareholders to decide what each director does for work. He or she could be paid or unpaid, and work full or part time.
A director who does not work in the company full time is usually referred to as a “non-executive” director. That title 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 or 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 of if he dares to disagree.
Next, we suggest that you read more about the duties of a director when the company is in financial trouble.