The process of appointing directors raises two kinds of issues:
- legal requirements
- the challenge of recruiting for such high levels of seniority and responsibility
Subject to the provisions of the company’s articles of association (referred to as ‘articles’), private limited companies must have at least one director and plcs must have at least two.
The first directors of a company are appointed at the time of registration of the company at Companies House. On registration, the person(s) named in form IN01 will be deemed to have been appointed as the first director(s).
Subsequent appointments (which are made on form AP01) are governed by the company’s Articles but any shareholders’ agreement should also be checked. Typically, articles will provide for the board of directors itself to appoint a new director to fill a casual vacancy, or to appoint additional directors up to the maximum number permitted by the articles.
The board of directors will need to pass a resolution in the normal way, ensuring that proper notice of the meeting is given, that it is quorate and the resolution is passed by a majority of the votes cast. Alternatively, a written resolution may be used by a private limited company.
To protect the shareholders, some Articles of Association require directors appointed by the board to retire at the next AGM and seek reappointment by the shareholders. This is becoming more unusual, especially as a private limited company is no longer required to hold an AGM unless its articles provide otherwise.
Elections or re-elections of directors following retirement by rotation, or removal of directors, are reserved to the company shareholders in general meeting.
On appointment, all directors (executive and non-executive), must signify consent to the appointment by signing form APO1, which must be filed at Companies House and can be submitted in electronic format. The director should be reminded to acquire the share qualification (if any) specified in the articles.
An executive director should be given an employment contract (sometimes called a Director’s Service Agreement).
A non-executive director should also be given a contract confirming the conditions of appointment (this is sometimes in the form of a letter).
Additionally the director should be invited to give a general notice of any interests in contracts involving the company. Directors of quoted plcs are required to declare their interest in the company’s shares under the disclosure and transparency rules.
Because directors play such an important role in companies, their recruitment demands a correspondingly systematic and professional approach.
Key factors to take into account are:
- the board should clearly identify the skills gap that it wishes to fill, based on its corporate objectives and priorities over the next five years. Doing so will make it easier to provide an accurate profile of the person who needs to be appointed
- a search plan should be devised to target prospective candidates. Here it may be cost-effective to use an executive search specialist firm
- a remuneration package should be offered that is both compatible with the company’s financial status and is likely to attract the kind of candidates the company requires. Useful information on remuneration can be found in Directors’ Rewards, the annual survey of director pay and benefits published by Croner Reward
© Institute of Directors. All rights reserved.