The board of directors is a group elected by the shareholders who are responsible for running the company on behalf of the shareholders. Usually, the board of directors focuses on increasing shareholders’ interests.
Welcome to the series notes of corporate and business law ACCA F4 paper, In this article, we will discuss the board of directors.
What Is The Board Of Directors
Directors or directors are the person/persons who are responsible for the running of the business, shareholders are the owner of the business or the company and directors run that company on behalf of the shareholder. Directors such as CEO and CFO.
Directors are based on their functions, not by their titles, and must be 16 or above in age and should be a natural person means a living person.
The person who is elected or appointed as a director by “Article of Association” is known as a “De Jure Director.
A person who is not a director but performs all the duties of a director is said to be a “De Facto Director“.
All the employees including management obey this person and work according to him/her.
What Are The Types Of Directors
There are different types of directors some of the major types are discussed below:
CEO Or MD
They carry out day-to-day management functions and operations, They play dual roles 1 as members of the board or as an executive officer. The CEO or MD can sign any contract of the company because of the authority.
Shadow Director
These are similar to “De Facto Director”. Rules are applied to these and other directors as well.
Executive Director
These are involved in management functions and work as full-time employees based on salary. These perform specific tasks or contracts and they have specific titles like finance director or sales director.
Non-Executive Director (NED)
- They do not work as a full-time employee
- They are from outside and are experts in their work
- Give independent vision
- Control over executive directors but has similar duties and rules with executive directors.
Chairman of Board
- He is the spokesperson of the company.
- And has voting right in the board meeting.
- He is the chairperson of the meeting
Alternate Director
- They attend the meeting on behalf of a director who is unable to vote in the meeting then these alternate director helps the director to give the vote.
- He can be a director of another company or an outsider.
Director Appointment
First Director
- A public company has at least two directors whereas a private company has only one.
- There is no maximum number of directors but can be specified by the articles.
Procedure for Appointing
- Can be appointed by existing directors or passing the ordinary resolution
- The public company usually chooses by giving the vote (under s160, Companies Act 2006)
Public Company Models Articles
- After the incorporation of a company in the first annual general meeting the directors retire and ask for re-election by an ordinary resolution.
- In every AGM most directors are retired or re-elected
- If there is an empty place for a director the board can fill it until the next AGM.
Publicity
After appointing the new director company must inform or notify the company’s house within 14 days and enter details in the director register.
Service Contract
- Any director can not work more than 2 years until or unless shareholders appoint him/her again by passing an ordinary resolution. (s188 CA2006)
- If the s188, CA2006 breach occurs then the director can be terminated by giving appropriate notice.
- Director’s remuneration report must be prepared every year. It should contain (Date of the contract, expiry, and notice period), (Provision for earlier termination before the contract), (And other provisions for termination).
Disqualification Of A Director In The Board Of Directors
A person who is not qualified as a director can not involve in management or he/she can not work as a liquidator nor he/she can be a receiver or promoter of a company.
General Misconducts in connection with the company
It includes,
- If a serious conviction occurs in connection a person may be disqualified for 15 years.
- If he breaches the rule of CA2006, he may be disqualified for 5 years breach such as failure to file returns.
Unfitness Disqualification
It includes,
- Where the department of business, Innovations, or skills found that the person is unfit for the position of director or management.
- If a liquidator found that a person who is serving as a director is not fit for management, he may be disqualified for 2 years minimum ad a maximum of 15 years.
Other Disqualification cases
- If involved in fraudulent or wrongful trading (maximum of 15 years disqualification)
- If he is bankrupt
- Taking work from another person as a director
Disqualification Breach
- It is a criminal offense that may be a fine or imprisonment for a person
- A disqualified director is liable for companies debts that occur during his time
Removal Of Director In A Company
The director can be removed by passing an ordinary resolution under s168, CA2006 if there is nothing mentioned in,
- Articles
- Or agreement
Procedure for removing a director
- 28 Days Special Notice
- Give the meeting notice to the directors and the members who have voting rights
- Directors can require written representation by the members
- The director can read the representation and can speak in the meeting, and an ordinary resolution is necessary for the removal of a director.
What Are The Duties Of A Director In A Company
The duties of a director are now replaced or made specific by the statutory, define under s170, Companies Act 2006. Before the Companies Act 2006, only fiduciary duties were imposed on the directors.
S171, Duties to Act Within the Powers
Direct should follow the company’s constitution or work according to his power or within his authority. He should use his power for only the company’s interest.
If a director acts for his personal interest then it will be stopped until shareholders allow him to do that act.
S172, Duties to Promote the Success of the Company
Directors must work or fill their duties with honesty, so they can promote success for the company, and they should work in the company’s and shareholder’s interest.
- Effects in the short and long term for a project or decision
- Work in the company’s and employee’s interest
- Make good relations with suppliers and customers
- Lock and check the impacts of business work on the environment
- Maintaining a high standard for a company
- Act fairly among all members of the company
Directors’ duties vary according to the organization’s nature. Shareholder’s or company interest is not only the duty of a director but it may vary according to the business or organization’s nature.
S173, Duty to exercise independent judgment
The director should be judged independently.
What Is Reasonable Duty
It consists of two elements:
- Objective Test: Directors should know about the work which is given to them, they should experts in dealing with and managing difficulties. He should generally know about the company.
- Subjective Test: A director should know about his own skills and about his degree skills, as hope from another person in the same field.
Diligence duty
- He should have knowledge about general matters about the company which a director must know.
- Director has special skills and has general knowledge about a company
- He should have actual knowledge and experience which is necessary for a director
If there are so many directors in a company then they should avoid conflict because they both work for the same company so if the increase their hate and conflict, it will not be better for a company’s future.
Power Of The Directors In The Company
Shareholders have the power to take major decisions about the business whereas the board of directors manages the day-to-day activities of a business.
The power of a director is defined in the “Article Of Association“. If there is mentioned in the article that every decision must be taken by the board of directors then members can not take action or can stop them from their decision as directors are the agent of the company, not the member (shareholders).
Member Power In The Company
- They can take action by resolution
- Members can remove the director by passing an ordinary resolution
- Members can change or can make changes in the articles by passing the special resolution
Control Of A Director
Directors are only responsible to manage day-to-day activities in the business. Members or shareholders can think about their own interests but directors can not.
Most decisions are taken if there is a majority vote satisfied sometimes by 50% or 75%, the shareholder who has very low shares in a company may not take the taste of taking or making the decision in a company.
Authority Of The Board Of Directors
Express Authority: Power given in written contract or agreement.
Implied Authority: Expect from a director because of his position and status as a director.
Apparent/Ostensible Authority: Whether a director has no authority for binding the contract but he does on the behalf of members or other directors because he represents himself as a director.
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