Differences between directors and managers
The roles of director and manager are both important, yet different. It is not simply a matter of seniority - both in law and in practice, the director is responsible for all that a company is and for what it strives to be.
There are many points of view concerning the differences between directors and managers. One maxim states “Managers manage people and processes, directors manage the managers”. A counter argument runs that the difference counts for little in the real world, especially in the SME setting, where the business founder is often both registered director and senior manager.
These differences become clearer when we take a broad view of a business – what is the business actually for? where is the business going? is the business doing the right thing? should the business keep going unchanged? is change required? can positive change be imagined? It is company directors who have to supply the answers.
Ultimately, managers are concerned with things that already exist – the employees, equipment and processes required for the company to do what it does. Directors are responsible for the actions and decisions of managers, but a director’s main duty is to define the vision for the business and then devise and execute a strategy to attain the vision. Along the way, the company director is responsible for ensuring that the interests of company shareholders and stakeholders are recognised. This is rarely easy.
It is also important to understand that UK law and the UK Corporate Governance Code both make a very clear distinction between managers, who answer to their company, and directors who answer for their company.
UK law and company directors
From the moment a person becomes a registered director of a company, they are subject to a series of legal obligations which do not concern managers. The new director must provide their personal details to Companies House, and will thereafter be the point of contact between the company and the UK state.
The Companies Act 2006 (CA2006) sets down these general duties for company directors:
- To promote the success of the company
- To exercise independent judgement
- To exercise reasonable care, skill, and diligence
- To avoid conflicts of interest
- To not accept benefits from third parties
- To declare any interest in proposed transaction or arrangement
As job specifications go, this is very broad and places great emphasis on the personal qualities and integrity of the director.
Risk and reward
The personal risk which company directors assume, and the greater rewards they receive as a consequence, also set directors apart from managers.
In the small, micro and startup business settings, company directors can assume a high degree of financial risk – second mortgages, bank loans, even maxed-out credit cards, are used to obtain the money to start a business. When a growing company appoints a manager, the manager will at least receive a salary, and may also be granted additional benefits.
Given the legal demands imposed on directors, plus the financial and other risks they often assume, it’s worth asking why people become directors in the first place. One compelling reason is the greater financial reward for assuming the risk and responsibility of leading a business. If the director has total or partial ownership of the company, the opportunity to increase their personal wealth is far greater than for a manager.
People also become directors because their personality inclines towards being their own boss or exercising decisive control in an organisation. Reaching such a position is itself one of the rewards directors strive for.
The following sums up the key differences between directors and managers.
It is the board of directors who must provide the intrinsic leadership and direction at the top of the organisation; establish and maintain its vision, mission and values.
It is the role of managers to carry through the strategy on behalf of the directors.
Directors are required to determine the future of the organisation, its strategy and structure and protect its assets and reputation. They also need to consider how their decisions relate to ‘stakeholders’ and the regulatory framework. Stakeholders are generally seen to be the company’s shareholders, creditors, employees, customers, and increasingly, a community in which it operates.
Managers are concerned with implementing the decisions and the policies made by the board.
Duties and responsibilities
Directors, not managers, have the ultimate responsibility for the long-term prosperity of the company. Directors are required in law to apply skill and care in exercising their duty to the company and are subject to fiduciary duties. If they are in breach of their duties or act improperly, directors may be made personally liable in both civil and criminal law. On occasion, directors can be held responsible for acts of the company. Directors also owe certain duties to the stakeholders of the company as listed above.
Managers have far fewer legal responsibilities (see factsheet)
Relationship with shareholders
Directors are accountable to the shareholders and other stakeholders for the company’s performance and can be removed from office by them, or the shareholders can pass a special resolution requiring the directors to act in a particular way. Directors act as ‘fiduciaries’ of the shareholders and should act in the best interests of the company (as a separate legal entity).
Managers are usually appointed and dismissed by directors or management and do not have any legal requirement to be held to account.
Ethics and values
Directors have a key role in the determination of the values and ethical position of the company.
Managers must enact the ethos, taking their direction from the board.