There are different types of directors and directorships in organisations, but if you are a company director, you sit on the board of a company. Company directors have legal rights and responsibilities and can be personally liable if things go wrong.
What is a company director?
A company director is an office-holder, which means that they have a legal status and responsibilities.
As a director, they are legally responsible for the company’s business and can be held accountable for its actions. This is why directors should have D&O liability insurance. It protects directors and officers who may be personally sued by someone aggrieved by the company’s actions, whether that person is an employee, vendor, competitor, investor, customer, or another party.
Directors of companies are generally appointed to the board following a formal process, and they are then registered with the companies office.
The minimum number of directors for most companies is two. Directors are responsible for managing the affairs of the company. To become a director, you do not need formal qualifications, but a formal qualification helps.
There are, however, some people who are ineligible to serve as directors of companies, such as auditors, bankrupts and people disqualified by court order.
An executive director and a non-executive director are treated the same legally, and their responsibilities are the same. (see below)
A general meeting of shareholders normally appoints directors to the board of a company.
Why do companies have directors?
Directors are responsible for making decisions for their companies. Directors must ensure that a company complies with its legal requirements.
All companies must maintain proper books and records. Ideally, they should:
1: Document and explain the company’s transactions.
2: Ensure that the financial position of the company can be accurately determined at any time.
3: Make sure the balance sheet and the profit and loss accounts comply with the Companies Act.
4: Ensure that the accounts can be audited efficiently and adequately.
How do directors perform their roles?
The board of directors (Board) is responsible for overseeing the company’s operations. They are responsible for making strategic decisions, ensuring a smooth business operation, and compliance with statutory requirements.
During board meetings, directors collectively exercise their rights and responsibilities. While certain directors or committees may have specific duties, the directors remain legally liable as a whole.
What is an executive director?
As well as holding the statutory position of director, an executive director is also employed by the company, usually in charge of a specific area of business (e.g. finance director or sales director). The executive directors are responsible for the daily operations of the company.
What is a non-executive director?
A non-executive director does not work directly for the company. They are independent outside voices who advise the board and often have particular expertise such as digital transformation, HR, or ESG.
In addition to attending board meetings and having the same duties and responsibilities as executive directors, non-executive directors oversee a company’s strategy, ethics, and integrity as an independent voice.
The ultimate responsibility
A basic definition of a company director could be any who is registered at the company registration office as a director of the company. This would make the company director a member of the board of directors.
The role of the director can be one of the most critical roles in the organisation. Directors can also be known as statutory directors.
Since they are instrumental in the business’s success, when choosing a company director, it is vital to ensure that they share the vision for the future direction of the business.
The ultimate responsibility of the company director is to manage the business on behalf of the shareholders.
Other types of directors
Statutory directors legally make decisions on behalf of the company. If you say that someone was appointed to the board of directors, then this would mean they are a statutory director.
The managing director or CEO is responsible for implementing the board’s strategy.
Other types of directors can include nominee directors, shadow directors, and alternate directors.
While others within the company may use the word director in their title, such as ‘director of communications’, it is crucial to understand that unless the board has appointed this person, they are not a statutory director.
Duties and responsibilities
As the company director, you need to be aware of your fiduciary duties and responsibilities. A director should act in the best interests of the company, and there are various legal obligations.
The legal duties of company directors are outlined under the Companies Act within your jurisdiction. Anyone over 18 can become a company director (in the UK, this is over 16), providing they are not currently declared bankrupt or have been disqualified or restricted from acting as a director.
A company director should be able to read financial reports and understand the state of the company. They should also understand the risks the company might be facing and ensure that legal requirements are met. A director should establish good practices and policies and ensure the company is registered correctly and that all taxes are filed.
Benefits and risks
There are many benefits to being a director, such as having a say in running the company and networking with other company directors.
However, there are also risks such as fines and even prison sentences if you fail to meet your legal requirements and responsibilities. For example, failing to keep financial records up to date could result in six months in prison or a fine of €5,000.
A director can be held personally liable for the company’s debts if the company is unlimited.
A company director gets their authority from the company’s articles of association. The director must consider the future consequences of their decisions, the impact on employees, the companies relationship with other stakeholders, and the obligation to maintain excellent standards.
A director should also try to avoid conflicts of interest such as holding numerous directorships, having significant investments in something like a property in which the company’s activities might become involved, and profiting from the inside knowledge gained while being a director of the company. Such conflicts of interest could also apply when considering close family members of the director.
- A company director is someone who sits on the board of a company.
- As a director, they are legally responsible for the company’s business and can be held accountable for its actions.
- As a director, you need to be aware of your fiduciary duties and responsibilities. A director should act in the best interests of the company, and there are various legal obligations.
- The ultimate responsibility of the director is to manage the business on behalf of the shareholders.