What is a director?
The director is the most senior full-time executive of the company, except when there is an executive Chair. This factsheet explains what the role entails and outlines what skills are required.
The managing director is responsible for the performance of the company, as dictated by the board’s overall strategy. The main purpose of the role is to direct and control the company’s operations and to give strategic guidance and direction to the board to ensure that the company achieves its mission and objectives.
As the person in charge of the company, the role of director comes with enormous responsibility and is remunerated accordingly. He or she effectively runs the business on a day-to-day basis while also overseeing the bigger picture. When things go well, the managing director is accountable. Similarly, if events turn sour, the buck stops with the MD.
“Most directors are clearly appointed by the board or by shareholders, and their details are registered at Companies House. They may be executive or non-executive. “An executive director is a director who is also an employee of the company. Their contract of employment will impose specific duties: for example, a finance director will be responsible for the day-to-day management of the company’s finances” – from The Directors Handbook, third edition.
The issue of whether to treat directors as employees or not when it comes to salary or payments for services is complex, so we would recommend you contact the IoD tax helpline with questions. However, the basic position is as follows:
Both executive and non-executive directors are classified as office holders/officers of the company. Non-executive directors will usually have a letter of appointment, unlike executive directors who will have a contract of employment, however as far as HMRC are concerned, they are both subject to taxation under PAYE and to NI contributions, much as employees.
Some have attempted to argue that payments to non-executive directors through their personal service companies makes them exempt from PAYE, but HMRC have never accepted this, and maintain that such payments would be caught under IR35 rules. Certainly HMRC compliance checks are putting increasing emphasis on proper PAYE deductions being made by the engaging company. It is the engaging company that will end up paying any PAYE/NIC not deducted, plus any penalties and surcharges.
It is worth noting that non-executive directors often provide other consultancy services, and any work other than the non-executive director role must be the subject of a completely separate contract for a consultancy-type role, not subject to PAYE. The non-executive director role is a contract of service whereas the consultancy role is a contract for services.
As well as directors duly registered at Companies House, there are other categories including de facto and shadow directors. More information on these can be found in the IoD factsheet: De facto directors and their liabilities.
What does the role of director involve?
Firstly, it is worth noting that there are many fundamental differences between being a director and a manager. The differences are numerous, substantial and quite onerous. The IoD outlines the major differences here: The differences between directors and managers.
According to Gov.uk: “As a director of a limited company, the law says you must:
- Try to make the company a success, using your skills, experience and judgement
- Follow the company’s rules, shown in its articles of association
- Make decisions for the benefit of the company, not yourself
- Tell the shareholders if you might personally benefit from a transaction the company makes
- keep company records and report changes to Companies House and HM Revenue and Customs (HMRC)
- Make sure the company’s accounts are a ‘true and fair view’ of the business’s finances
- Register for self-assessment and send a personal self-assessment tax return every year
You can hire other people to manage some of these things day-to-day (eg an accountant) but you’re still legally responsible for your company’s records, accounts and performance.”
Legal requirements and restrictions for companies to have directors
S154 of the Companies Act 2006 requires a private company to have at least one director, and a public company to have at least two directors.
There are a few restrictions as to who cannot become a director:
- Disqualified by the company’s articles of association
- The company’s auditor
- Disqualified by a court order
- If a current undischarged bankrupt
- Someone under the age of 16
Seven legal duties of a director
UK company law defines a number of general legal duties for directors of UK companies. For more information on the duties relevant to private companies and to view the list of the key legal duties of a director, please refer to the following guide: Corporate governance guidance and principles for unlisted companies in the UK
1. The duty to act within powers
Directors must act in accordance with the company‘s constitution (ie the articles of association and resolutions of general meetings), and only exercise powers for the purposes for which they are conferred.
2. The duty to promote the success of the company
Directors must act in a way which they consider, in good faith, will promote the success of the company for the benefit of its members (shareholders) as a whole, having regard to:
a) the likely consequences of any decision in the long term
b) the interests of the company‘s employees
c) the need to foster the company‘s business relationships with suppliers, customers and others
d) the impact of the company‘s operations on the community and the environment
e) the desirability of the company maintaining a reputation for high standards of business conduct
f) the need to act fairly as between members of the company
3. The duty to exercise independent judgement
Each director must exercise independent judgement in his or her decision making
4. The duty to exercise reasonable care, skill and diligence
Directors must exercise reasonable care, skill and diligence in their duties. The meaning of “reasonable care, skill and diligence” is judged according to what may reasonably be expected of a person carrying out the functions of director of that company. It is also judged according to the general knowledge, skill and experience of the individual director.
5. The duty to avoid conflicts of interest
Directors must avoid situations in which they could have a direct or indirect interest that conflicts with the interests of the company. This applies in particular to the exploitation of any property, information or opportunity (regardless of whether the company could take advantage of that property, information or opportunity). However, this duty is not infringed if the matter has been authorised by the board.
6. The duty not to accept benefits from third parties
Directors must not accept benefits from third parties unless the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.
7. The duty to declare an interest in a proposed transaction or arrangement
If a director has a personal interest, direct or indirect, in a proposed transaction or arrangement with the company, he or she must declare the nature and extent of that interest to the other directors before the transaction or arrangement takes place”.
For further information, the Companies Act 2006 provides a legal checklist of duties with which a director must comply; these are discussed further in the IoD factsheet Directors’ duties and responsibilities.
The six key attributes of an effective director
At the IoD, we believe that excellence and professionalism in the boardroom are essential for business. To support and promote this belief, we run an extensive range of courses, conferences, seminars, development programmes and services specifically designed by directors for directors. To find out more visit IoD Training.
1. Strategic perception
- Change-orientation: Alert and responsive to the need for change. Encourages new initiatives and the implementation of new policies, structures and practices.
- Creativity: Generates and recognises imaginative solutions and innovations.
- Foresight: Is able to imagine possible future states and characteristics of the company in a future environment.
- Organisational awareness: Is aware of the company’s strengths and weaknesses and of the likely impact of the board’s decisions upon them.
- Perspective: Rises above the immediate problem or situation and sees the wider issues and implications. Is able to relate disparate facts and see all relevant relationships.
- Strategic awareness: Is aware of the various factors which determine the company’s opportunities and threats (for example, shareholder, stakeholder, market, technology, environmental and regulatory factors).
2. Decision making
- Critical faculty: Probes the facts, challenges assumptions, identifies the (dis)advantages of proposals, provides counter arguments, ensures discussions are penetrating.
- Decisiveness: Shows a readiness to take decisions and take action. Is able to make up his/her mind.
- Judgement: Makes sensible decisions or recommendations by weighing evidence, considers reasonable assumptions, the ethical dimension, and factual information.
3. Analysis and the use of information
- Consciousness of detail: Insists that sufficiently detailed and reliable information is taken account of, and reported as necessary.
- Eclecticism: Systematically seeks all possible relevant information from a variety of sources.
- Numeracy: Assimilates numerical and statistical information accurately, understands its derivation and makes sensible, sound interpretations.
- Problem recognition: Identifies problems and identifies possible or actual causes.
- Listening skills: Listens dispassionately, intently and carefully so that key points are recalled and taken into account, questioning when necessary to ensure understanding.
- Openness: Is frank and open when communicating. Willing to admit errors and shortcomings.
- Verbal fluency: Speaks clearly, audibly and has good diction. Concise, avoids jargon and tailors content to the audience’s needs.
- Presentation skills: Conveys ideas, images and words in a way that shows empathy with the audience.
- Written communication skills: Written matter is readily intelligible; ideas, information and opinions are conveyed accurately, clearly and concisely.
- Responsiveness: Is able to invite and accept feedback.
5. Interaction with others
- Confidence: Is aware of own strengths and weaknesses. Is assured when dealing with others. Able to take charge of a situation when appropriate.
- Coordination skills: Adopts appropriate interpersonal styles and methods in guiding the board towards task accomplishment. Fosters cooperation and effective teamwork.
- Flexibility: Adopts a flexible (but not compliant) style when interacting with others. Takes their views into account and changes position when appropriate.
- Presence: Makes a strong positive impression on first meeting. Has authority and credibility, establishes rapport quickly.
- Integrity: Is truthful and trustworthy and can be relied upon to keep their word. Does not have double standards and does not compromise on ethical and legal matters.
- Learning ability: Seeks and acquires new knowledge and skills from multiple sources, including board experience.
- Motivation: Inspires others to achieve goals by ensuring a clear understanding of what needs to be achieved and by showing commitment, enthusiasm, encouragement and support.
- Persuasiveness: Persuades others to give their agreement and commitment; in face of conflict, uses personal influence to achieve consensus and/or agreement.
- Sensitivity: Shows an understanding of the feelings and needs of others, and a willingness to provide personal support or to take actions as appropriate.
6. Achievement of results
- Business acumen: Has the ability to identify opportunities to increase the company’s business advantage.
- Delegation skills: Distinguishes between what should be done by others or by themselves. Allocates decision making or other tasks to appropriate colleagues and subordinates.
- Exemplar: Sets challenging but achievable goals and standards of performance for self and others.
- Drive: Shows energy, vitality and commitment.
- Resilience: Maintains composure and effectiveness in the face of adversity, setbacks, opposition or unfairness.
- Risk acceptance: Is prepared to take action that involves carefully calculated risk in order to achieve a desired benefit or advantage.
- Tenacity: Stays with a position or plan of action until the desired objectives are achieved or require adaptation.
The IoD has produced a number of briefings around the topic of being a director which are all located under the Resources and factsheets section. The most relevant are:
- Directors’ duties and responsibilities
- Controls over directors powers
- De facto directors and their liabilities
- Differences between directors and managers
- Appointing directors
- Director’s service agreement
- The role of the Board
- The role of non-executive director
© Institute of Directors. All rights reserved.
Take your interest further with IoD Professional Development
The IoD delivers a directly relevant course – The Role Of The Director And The Board