Company Directors and Auditors 

What is a company director and a company officer? 

A company is an artificial person, and cannot manage itself. Companies therefore have individuals to give it leadership and direction. This is provided by the board of directors. Most of the powers of a company are given to its directors by its articles of association. 

Directors: The directors of a company do not have to be shareholders, unless there is a special requirement in the company’s articles that they must be shareholders.

For the purpose of company law, a person is a director if he or she carries out functions that can only be done by a director, or attends board meetings of the company’s directors. The word ‘director’ in a job title does not mean that a person is legally a director: for example, a ‘human resources director’ or an ‘IT director’ is not a director for the purpose of company law unless, for example, he or she attends meetings of the board of directors and joins in the decision-making processes of the board.

Company officers: A director is an officer of the company, carrying out duties on behalf of the company. The term ‘company officer’ is sometimes used in the Companies Act 2006 rather than ‘director’. A company officer is a person representing the company and might be: 

• a director 
• the company secretary, or 
• a manager who is not a director.

Types of Directors

 Executive directors: They are involved in two roles, one as director of the company and other as Employee of the Company i.e. day to day management of Company

 Non-Executive Directors: They are independent directors who just attend BOD meetings and are not involved in operations of the Company=. Benefits of NEDs are:

•  Maintain a balance in board which help in maintaining risk balance
•  Bring independence opinion in board decisions because of no personal interest
• Acts as a performance appraisal of BOD

Shadow directors: This director doesn’t hold any legal capacity but in reality he controls all of the directors. In case of any wrong act, shadow directors will equally be liable as normal directors. Shadow directors are not involved in day to day operations of company.

Chief executive Director / Managing director: CEO is one of the executive director of the Company and acts as head of executive directors within operations of company.

CEO can take decisions regarding operations of the company and has following three authorities:

1. Actual authority granted through AOA
2.  Implied authority granted through his position
3. Apparent authority granted due to impression given by other directors of his position

Chairman: He is head of the board and is authorized to manage the meeting of boards and maintaining the balance between EDs and NEDs.

• Chairman has tie breaker vote.
• It is recommended as good governance that chairman should be NED

De Jure director: One who is appointed is a proper and legal manner

De facto director: One who is not appointed in proper manner E.g. disqualified director, director below age of 16 years OR director appointed through insufficient votes

The Appointment of Directors

First directors: The first director or directors of a company are appointed when a company is formed

The Number of Directors: Age Requirement 

The law specifies a maximum or a minimum number of directors that a company must have. 

• A private company must have at least one director. 
• A public company must have at least two directors (s154 CA2006). 

There is no legal maximum to the number of directors. However, the company’s articles of association might specify: 

• a minimum number of directors that is higher than the legal minimum, or 
• a maximum number of directors

Appointment of subsequent Directors

• First Directors are appointed through statement of proposed officer submitted at the time of registration of company
• Subsequent directors are elected by shareholders through ordinary resolutions in every AGM
• In case of any casual vacancy other Directors appoint temporary director

Termination of Director

• Death
• Bankruptcy
• Disqualification by court
• Insanity
• Retirement by rotation –(every director retire once in every three years after which he must get himself re-elected)
• Resignation – (Any director can resign any time from company and he has the authority to submit statement of circumstances to shareholders if he has any issue to discuss with shareholders)

Removal of Directors

A director may resign from office at any time, for example because he wishes to retire. In public companies, the articles of association usually provide that the directors must also stand for re-election by rotation at the annual general meeting of the company. However, it is usual practice for directors to be reelected when they retire by rotation and stand for re-election, and it is unusual for a majority of the shareholders to vote against a director’s re-election.

 By the Shareholders

The articles of association of a company should also include a provision for the removal of a director from office, by a vote of the shareholders in a general meeting of the company. The Companies Act also states that a director may be removed from office by an ordinary resolution of the members (s168 CA2006). This requires a simple majority vote at a general meeting. This course of action may be taken by shareholders who want the dismissal of a director, but the other directors on the board do not agree. The shareholders wishing to put the proposal to a general meeting of the company must notify their intention to the company in advance of the meeting, giving notice of at least 28 days. (The director involved should receive a copy of the notice and should have the opportunity to speak at the general meeting.)

Loss of office 

In practice, it is fairly common for an executive director to be dismissed from his job, by a decision of the rest of the board. When a director is dismissed, the dismissal is often called ‘loss of office’. The dismissed executive director will usually have a contract of employment and so will have rights under the employment legislation.

In practice, when a director is forced from office, he is asked to resign. If he agrees to resign, this avoids the need to go through the formal process of removing him from office. It is usual for executive directors to negotiate terms of dismissal, such as compensation for loss of office. As a part of the negotiated settlement, the director will be required to resign from the office as director as well as losing his or her job.

Disqualification

An individual might not be permitted to act as a director of any company through disqualification.

Powers of the board of directors

The directors are given most of the powers to run their company. These powers are given by the company’s articles of association.

• Standard articles of association state that the board of directors may exercise ‘all the powers of the company’.
• The default model articles for a public company under CA2006 state that: ‘Subject to the Companies Acts and the articles, the directors shall manage the company’s business and may exercise all the powers of the company for any purpose connected with the company’s business.

These powers are given to the board of directors as a whole, not to individual directors. Individual directors cannot use powers to bind the company (for example, to commit the company to a contract agreement) unless they have been authorised to do so.

Delegation of Powers

The company’s articles of association will also usually provide for the board of directors to delegate some of their powers. When a managing director is appointed, the powers necessary for the day-to-day running of the company are delegated to him. The managing director will then delegate powers to other executive directors and to other members of the management team.

It is therefore usual for the powers of management of a company to be exercised as follows:

• ̈Some decisions are reserved for the board of directors, who take decisions collectively, usually in board meetings. Some decisions must be taken by the board of directors, such as approving the annual accounts and recommending a dividend to the shareholders.
• Other decisions are taken by managers of the company, including executive directors, who report to the managing director (or chief executive officer). The managing director is accountable to the board of directors for the activities and performance of the managers of the company. 

Remuneration of Directors

It is determined by board of directors in accordance with AOA. As per good governance remuneration of executive directors should be determined by Committee of Non-executive directors know as Remuneration Committee. Remuneration of NEDs is fixed through AOA by Shareholders in form of per meeting fee.

As per Company Law Remuneration contract of directors must not be greater than two years otherwise specific approval from shareholders must be taken.

In listed companies disclosure on director remuneration is required in Financial Statements along with an ordinary resolution each year. If the shareholders reject director remuneration then it will have no legal impact as contract is already made, however it shows their dissatisfaction.

In listed companies audit is also required of director remunerations that whether it is in ordinance with AOA or not

Duties of directors

Directors are under a duty of act in good faith of the company and for doing this CA 2006 has defined following duties of directors:

To Promote Success of Company

It is the duty of director to promote success of a company.

Success of the Company is a subjective matter and it varies from situation to situation. It is the duty of director to determine success of Company, however Company Act has provided following guidelines for success:

• Decisions should be based on long term view
• Decisions should consider the society and environment
• Decisions should consider the welfare of employee
• Decisions should consider the reputation of company
• Decisions should consider the long term business relations
• Decision should be in best interest of the company

Duty of Disclosure

Complete information to shareholders

Duty not to compete

Directly or indirectly with the company

Duty to avoid conflict of interest

Directors should avoid any situations in which the conflict of interest can be created. However if avoidance of such situation is not possible then business interest should be given priority with appropriate disclosure.

Directors should never accept the business opportunities personally unless that opportunity is rejected by company. It is to note that capacity of company to accept opportunity is not a relevant factor as Company may create capacity if required.

Duty to act within power

It is the duty of directors to act within powers and to use them in best interest of company. If a director exceeds his powers then it is known as ultra vires and directors will be personally liable for them. However company can ratify those acts through majority vote. This ratification can challenged by minority shareholders if it is not in best interest of company

Duty to exercise independent judgment

i.e. Irrespective of any pressure from majority shareholders

Duty to act with reasonable care and diligence

It is the duty of director to act with reasonable care and diligence while taking decisions of company. Reasonable care is determined by considering a fact that whether director has acted in a way what was expected from a person in his position (i.e. objective test). If director holds special skills and experience then court also considers it while assessing reasonableness of decision (i.e. Subjective Test).

Written by: Mahnoor Maqbool, Bright student of ACCA