Types of Company Director
Types of Director
The chairman creates the conditions for overall board and individual director effectiveness. With the help of the executive directors and the company secretary, the chairman sets the agenda for the board’s deliberations and ensures that strategy, performance, value creation and accountability, and issues relevant to these areas are reserved for board decision.
It is the responsibility of the chairman to:
- Create a climate in which thought and expression may flourish naturally
- Bring both individual and collective views together in a cohesive form
- Ensure awareness of what has been decided
The chairman also ensures effective communication with shareholders and other stakeholders and, in particular, that all directors are made aware of the views of those who provide the company’s capital.
The chairman of each board committee fulfils an important leadership role similar to that of the chairman of the board, particularly in creating the conditions for overall committee and individual director effectiveness.
Senior Independent Director
The boards of publicly listed companies should appoint a senior independent director from among their independent non-executives. To qualify as “independent”, non-executives need to have the necessary independence of character and judgement and also be free of any connections that may lead to a conflict of interest. This means not having any contractual or other relationship with the company or its directors apart from the current office of director and not being subject to any control or influence of a third party which could affect the exercise of independent judgement.
Senior independent directors serve as a sounding board for the chairman and act as an intermediary for the other directors. They are responsible for holding annual meetings with non-executives, without the chairman present, to appraise the chairman’s performance. They would also be expected to meet with the non-executives on other such occasions when necessary.
When the board is undergoing a period of stress, the senior independent director’s role becomes vitally important. He or she is expected to work with the chairman and the other directors, and/or shareholders, to resolve major issues. For example, they can act as an alternative point of contact for investors who may have made little headway in discussions with the chairman, chief executive or finance director – or who may have concerns about the performance of these individuals.
Where the relationship between the chairman and chief executive is particularly close, and they do not communicate fully with shareholders, the senior independent director is able to step in and provide a link.
Where there is a disagreement or dispute between the chairman and the chief executive, the senior independent director can intervene, identify issues that have caused the rift and try to mediate and build a consensus.
The lead-director role in America has grown out of amendments to the New York Stock Exchange listing requirements to require listed companies to have non-management directors meet at regularly scheduled executive sessions without management, overseen by a "presiding" director. This requirement combined with the increasing trend and pressure to increase board independence and separate the chairman and CEO roles led to the popularity of the independent lead-director role.
Many see it as an alternative to having a separate, independent chairman and accordingly attribute most of those responsibilities to the lead-director position. In its most basic form, the lead director is charged with leading the board's independent directors to engagement and consensus, ensuring that independent consensus is heard and implemented.
Executive directors have the same duties as other members of the board. These duties extend to the whole of the business, and not just that part of it covered by their individual executive roles.
Most probably they have a management role, but it might be as an internal advisor or specialist.
Executive directors have the most intimate knowledge of the company and its capabilities when developing and presenting proposals, and when exercising judgements, particularly on matters of strategy. They should appreciate that constructive challenge from non-executive directors is an essential aspect of good governance, and should encourage their non-executive colleagues to test their proposal in the light of the non-executives’ wider experience outside the company. The chairman and the CEO should ensure that this process is properly followed.
Chief Executive (CEO)
The chief executive is the most senior executive director on the board, with responsibility for proposing strategy to the board and for delivering the strategy as agreed. Their role is one of implementation; to implement board policy and report to the board on all aspects of that policy implementation.
They are accountable to the chairman and the board and are responsible for the management of the company within the guidelines laid down by the board, to which the CEO will also contribute.
The chief executive is responsible for devising the most appropriate management structure for the company and for recruiting, managing, motivating and retaining an effective management team, paying due regard to the needs of the future. It is up to them to communicate the company’s values and behaviour right through the company.
They should ensure that the board is provided with the reports and information it needs, both to monitor company performance and to take those decisions that are its collective responsibility.
The CEO’s relationship with the chairman is a key relationship that can help the board be more effective; the differing responsibilities of the chairman and CEO should be set out in writing and agreed by the board. The CEO is responsible for supporting the chairman to make certain that appropriate standards of governance permeate through all parts of the organisation.
In the UK all public companies are obliged to have a company secretary; private companies are no longer required to do so, unless their articles of association explicitly require them to. A company secretary does not need to be an individual but can instead be another company or a partnership.
A company secretary may not be a director, but will attend all board meetings and is directly answerable to the board; one of their prime functions is to produce minutes of a board meeting, which must be kept for at least 10 years.
The secretary will often be liable for breach of duty in the same way as board members. If they have prime responsibility for statutory tasks and there is a failure to comply, they will be the person in default and liable to a fine.
In a public company, the directors must make sure, as far as is reasonably possible, that the secretary has “the requisite knowledge and experience to discharge the functions of secretary of the company” and has the requisite qualifications, such as chartered accountant or chartered secretary.
They are responsible for advising the directors and board, maintaining the company’s statutory registers and books, and filing annual returns. They arrange meetings of the company’s directors and shareholders and ensure proper notices of meetings are issued; they prepare agendas, circulate relevant papers and take and produce minutes to record the business transacted at the meetings and the decisions taken.
The obligations and responsibilities of the company secretary necessitate them playing a leading role in the good governance of companies by supporting the chairman and helping the board and its committees to function efficiently.
The company secretary should report to the chairman on all board governance matters. This does not preclude them from also reporting to the CEO in relation to his or her other executive management responsibilities.
The appointment and removal of the company secretary should be a matter for the board as a whole, and the remuneration of the company secretary might be determined by the remuneration committee.
Chief Financial Officer (CFO)
The chief financial officer has a particular responsibility to deliver high quality information to the board on the financial position of the company.
Legally speaking, there is no distinction between an executive and non-executive director. Yet there is inescapably a sense that the non-executive's role can be seen as balancing that of the executive director, so as to ensure the board as a whole functions effectively. Where the executive director has an intimate knowledge of the company, the non-executive director may be expected to have a wider perspective of the world at large.
Non-executive directors bring experience and judgement to the deliberations of the board that the executive directors on their own would lack.
Non-executive directors should, on appointment, devote time to a comprehensive, formal and tailored induction, which should extend beyond the boardroom and include visiting and talking with senior and middle managers of the main business areas.
Non-executive directors should take into account the views of shareholders and other stakeholders, because these views may provide different perspectives on the company and its performance.
The New York Stock Exchange has recommended that a framework should be established to allow non-executive directors to meet at regularly scheduled executive sessions without management, as a means of promoting open discussion among themselves without any influence or pressure from executive directors.
The independent directors must designate, and publicly disclose the name of, the director who will preside at the executive sessions.
In contrast to executives, non-executive directors are normally remunerated on a fixed-fee basis. This is to ensure that non-executives retain an objective and independent perspective on the activities of the company. For this reason, share options would not normally form part of a non-executive’s remuneration framework.
A nominee director is one who acts as a non-executive director on the board of a company on behalf of another person or firm such as a bank, investor, or lender.
Nominee directors carry the same responsibilities, and risks, as other directors.
Nominee directorships can sometimes be useful, for example in preparing "off-the-shelf" ready-made companies. But the nominee system can be used to disguise control and is open to abuse if the nominee secretly hands back all control to the real owner. In many such cases they are residents of tax havens acting on behalf of non-residents as a trustee on the board of an off-shore firm in that haven.
De facto directors
The UK Companies Act simply defines a director as including any person occupying the position of director, by whatever name called.
A de facto director is someone who has not been legally appointed and notified to Companies House as a director but who nevertheless acts as a director and holds them self out to third parties as a director.
The matter is determined on an objective basis and irrespective of the person’s motivation or belief. There is no definitive test to determine the issue and all relevant facts need to be taken into account in determining whether or not you will be deemed to be a de facto director.
It is the role of the individual, rather than the title used that determines whether an individual is a director or not. The de facto director will usually carry out all the duties of a director and can make the decisions of a director, sign company documents and be treated as a director by other directors.
The de facto director is subject to the same legal duties, responsibilities and potential liabilities as de jure directors and will be treated as such by the courts in the case of a dispute.
Relevant factors they will consider include:
Whether there were other persons acting as directors
- Whether the individual has been held out is acting as a director, including using the title director in communications, or has been considered to be director by the company or third parties
- Whether the individual was part of the corporate governing structure
- In what capacity of the individual was acting
Acts of a de-facto director can include:
- Accepting responsibility for the company’s financial affairs
- Acting as sole signatory for the company bank account
- Negotiating with third parties on behalf of the board
- Recruiting and appointing senior management positions
This type of director is one that is not formally appointed to the board, or registered as such.
A shadow director is "a person in accordance with whose directions or instructions the directors of a company are accustomed to act". Under this definition, it is possible that a director, or the whole board, of a holding company, and the holding company itself, could be treated as a shadow director of a subsidiary.
A founder or significant shareholder who wishes to escape the disclosure requirements of a directorship might still be counted as a 'shadow' director and held responsible for actions as if he or she were a formal director.
Professional advisors giving advice in their professional capacity are specifically excluded from the definition of a shadow director in UK companies legislation.
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