Types of directors: myths and common pitfalls
25 March 2020
Below we answer some of the most common questions and address frequent pitfalls in the often-confusing realm of company directors.
What is a statutory director?
The term “statutory director” is one that many people use to describe a director who has been formally appointed under the Companies Act 2006 (CA 2006) and in accordance with the company’s constitution. However, whilst that is a commonly understood expression there is in fact no such thing in legal terms. Strictly, the correct term for a director who has been validly appointed under the CA 2006 and the company’s constitution is a “de jure” director.
A “de jure” director may be either an executive or a non-executive director, the difference between which we will examine further in the next section.
What is a non-executive director, and how are their duties different from an executive director?
Whilst an executive director is usually a director that is an employee of the business and also holds an executive role, a non-executive director is a director that is neither an employee nor an executive. A non-executive director rather devotes only part of their time to the affairs of the company as an independent adviser or supervisor.
Under the CA 2006, the duties owed to the company by a non-executive director are exactly the same as those owed by an executive director. However, in practice the threshold for discharging this duty may vary according to the director’s specific role on the board. At a minimum, a non-executive director is required to take “reasonable steps to place themselves in a position to guide and monitor the management of the company” but it is always prudent for a non-executive director to consider all of their duties as a director when performing their role.
In relation to a listed company, non-executive directors are often given quite distinct and responsible roles in relation to the governance of the company. This could raise expectations as to their duties to the company.
What is a shadow director?
A “shadow director” is a person in accordance with whose directions or instructions the directors of the company, or a governing majority of them, are accustomed to act.
As to whether someone is a “shadow director” is a question of fact for the courts depending on the specific circumstances. This category ensures that anyone who exercises real influence over a company is subject to appropriate duties and potential liabilities.
Shadow directors do not have exactly the same duties as directors, but there is a great deal of overlap. The general duties of directors apply to shadow directors where and to the extent that they are capable of so applying.
How does a de facto director differ from a shadow director?
Whilst a shadow director would not hold themselves out as a director, a de facto director might.
A de facto director is someone who is acting as a director but has not been validly appointed as such. It is rare to come across a de facto director today. A de facto director is subject to the same duties and potential liabilities as a de jure director.
How do job titles affect this?
Someone with the job title Marketing Director is likely to have been formally appointed as an executive “de jure” director. This is less likely in the case of someone with the job title Director of Marketing. It has become common to expect someone in the role of “Director of …..” to be an employee and not necessarily also a director of the company.
It is important to be clear on job titles, roles, and director status, as confusion could result in a company being considered to be holding an individual out as a director. That means that the individual may have ostensible authority to bind the company. That may never have been the company’s intention as they have not been validly appointed as a director.