Definition
A director is an individual appointed to oversee the management and strategic direction of a company. Public companies must have at least two directors, while private companies must have at least one. Directors collectively form the board of directors, which is responsible for making significant decisions and guiding the company’s overall strategy. They have various fiduciary duties and responsibilities, which are codified under the Companies Act 2006 in the UK.
Key Points:
- Appointment: Initial directors are named in the articles of association or appointed by subscribers. Subsequent directors can be appointed by the company’s existing directors but must be ratified at the general meeting.
- Removal: Directors can be discharged by an ordinary resolution with special notice at a general meeting.
- Duties: Directors owe duties of honesty and loyalty (fiduciary duties), and a duty of care based on their personal qualifications.
Specified Duties under the Companies Act 2006:
- Duty to act within the powers of the company’s constitution.
- Duty to promote the success of the company for the benefit of its members as a whole.
- Duty to exercise independent judgment.
- Duty to exercise reasonable care, skill, and diligence.
- Duty to avoid conflicts of interest.
- Duty not to accept benefits from third parties.
- Duty to declare interests in proposed transactions or arrangements.
Examples
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Appointment of a Managing Director:
- A notable manufacturing firm appoints a managing director named in its articles of association. This managing director has extensive executive powers to ensure operational efficiency and decision-making.
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Disqualification for Wrongful Trading:
- A director is disqualified for engaging in wrongful trading, which involves continuing to operate a company while knowing it cannot avoid liquidation, thus increasing debts.
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Directors’ Remuneration:
- In the annual general meeting of a tech-startup, directors’ salaries, fees, and expense allowances along with any pension payments are disclosed in the company’s accounts.
Frequently Asked Questions (FAQs)
What is the Role of the Board of Directors?
The board of directors is collectively responsible for the company’s overall governance, strategic direction, and major decision-making. They ensure that appropriate controls and systems are in place.
How Are Directors Appointed?
Directors are initially named in the articles of association or appointed by the subscribers. Further appointments by existing directors must be ratified by the shareholders at a general meeting.
Can a Director Be Removed?
Yes, directors can be removed by an ordinary resolution with special notice at a general meeting, adhering to company regulations and any existing service contracts.
What Are the Fiduciary Duties of a Director?
Directors owe fiduciary duties, including honesty, loyalty, independent judgment, reasonable care, skill, diligence, and avoidance of conflicts of interest.
What Constitutes Directors’ Remuneration?
Directors’ remuneration includes salaries, directors’ fees, and expense allowances. These must be detailed separately in the company’s financial statements from any pension payments or compensation for loss of office.
Related Terms
- Executive Director: A director involved in the day-to-day management of the company.
- Non-Executive Director: A director not involved in daily operations but provides independent oversight.
- Shadow Director: A person not formally appointed as a director but whose directions the company’s directors follow.
- Registrar of Companies: An official responsible for maintaining the register of companies.
- Ordinary Resolution: A resolution passed by a simple majority of shareholders.
- Service Contract: An agreement outlining terms of employment between a director and the company.
- Fraudulent Trading: Engaging in business activities with intent to defraud creditors.
- Wrongful Trading: Continuing to trade when knowing the company cannot avoid going into liquidation.
Online Resources and References
Suggested Books for Further Studies
- “Corporate Governance: Principles, Policies and Practices” by Bob Tricker
- “Directors’ Duties: Principles and Application” by Simon Mortimore QC
- “The Role of the Board of Directors in Enron’s Collapse” - U.S. Government Printing Office
- “Company Law: Theories, Principles and Applications” by Nicholas Bourne
- “Corporate Governance and Accountability” by Jill Solomon
Accounting Basics: “Director” Fundamentals Quiz
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