Director – What is a director?
A director is an elected individual who, along with other directors, is responsible for a company’s corporate policy. Collectively, directors form the board of directors.
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Every private company must have at least one director, while public companies must have at least two directors. Many non-profit organisations also choose to have a board of directors.
Duties and responsibility of company directors
As stated in the Companies Act 2006, the board of directors’ overarching goal is to look out for the company’s financial wellbeing and “promote the success of the company for the benefit of its members as a whole".
The general responsibilities of the directors include:
- Setting the company’s objectives and implementing corporate policy
- Adopting bylaws
- Hiring, monitoring, and firing executives
- Setting dividend policies and paying executive compensation
- Issue additional shares
If a company is large enough, the directors will need to produce a directors’ report at the end of each financial year.
Directors’ powers come from the company’s articles of association.
Different types of directors
Directors may be responsible for a particular area of the company, or a certain program or project. Companies often have several directors who are spread throughout the business in different roles. For example, a director of finance, a director of operations, and a director of human resources.
Directors usually report directly to a vice president or CEO. Large organisations may also have assistant or deputy directors.
An inside director works in the interest of major shareholders, officers, and employees. Their expertise comes from their experience in the company
Inside directors do not receive additional pay for attending meetings or providing guidance as these duties are included in their job description.
Outside or independent directors are not internal employees. When outside directors attend meetings or offer guidance, they usually receive additional pay as these duties are not officially part of their job.
Independent directors’ expertise comes from working with other businesses and within the industry more generally. As they are not as invested in the business as inside directors, independent directors can provide a more objective outlook on how the company can meet its goals and how disputes can be settled.
How are new directors appointed?
Directors are usually appointed by shareholders at the company’s Annual General Meeting (AGM). The appointment is put to a vote, and is passed if the majority of shareholders vote in favour of the appointment.
In some circumstances, a vote may need to be carried out at an Extraordinary General Meeting (EGM), for example, if a director suddenly leaves or there is an unexpected vacancy. In these circumstances, the remaining directors can appoint a new director temporarily, but the new appointment but be confirmed by a shareholders’ vote as soon as possible.
The process for appointing a new director varies between companies, the specific process is usually set out in the company’s articles of association.
Whenever a new director is appointed, the company must notify Companies House within 14 days of the appointment.
How can directors be removed?
Directors may be removed from a company through retirement, failure to be re-elected, by court order, or through a shareholders’ vote. Some of the most common reasons for removing a director include:
- The director resigning from office
- The director being absenct from board meetings over a consecutive period of six months
- A breach of the directors’ service contract
- Disqualification under the law.
Removal by ordinary resolution
Because shareholders appoint directors, directors can be removed at the shareholders’ discretion. The decision must be put to a vote a general meeting.
If a shareholder wants to propose a resolution to remove a director, they must give at least 28 days notice. The director in question has the right to attend and speak at the meeting.
A resolution to remove a director can only be passed if it receives a majority vote. This means that shareholders holding more than 50% of a company's shares must vote in favour of the resolution for the director to be removed – in theory, a majority shareholder (someone who owns more than half of a company’s shares) can remove a director by themselves.
Retirement by rotation
Under retirement by rotation, non-executive directors must be re-elected at each general meeting. If a director is not re-elected, they are no longer a member of the board of directors.
Retirement by rotation used to be a legal requirement for all UK companies, but this was removed in the Companies Act 2006.
Disqualification by the Court
Directors can be legally disqualified from their post if it can be proven that they are incompetent or unfit to hold their position. For example, a director can be removed by the Court if they repeatedly fail to correctly file statutory accounts with Companies House, or if they are convicted for a criminal offence related to running the company.