What are the Roles of a Company Director?

Ryan Patrick

• 9 min read
What are the Roles of a Company Director?

Two bodies run a company: shareholders (owners) and company directors.

According to the Companies Act 2006, UK Limited company directors have general roles and legal rights. However, if there is a failure to fulfil these responsibilities, it makes company directors liable when things go south.

A company director manages activities and performance geared towards the business’s success. There are different kinds of directors in a company, but they all sit on the board. A company director’s roles include decision-making, setting a strategic direction, and ensuring the company is legally compliant.

Although the position of a company director may vary from one business to another, there are key roles to fulfil. Don’t miss to read this guide to understand the fundamental roles of a company director.

Who is a Company Director?

A company director holds an office, meaning they have a legal status and responsibility.

Directors are legally responsible for a company’s business. They can be held accountable for the company’s actions, which explains the need for insurance.

Insurance keeps directors and shareholders safe if they’re sued by anyone aggrieved by the company’s actions.

Legal issues against a company can come from a vendor, employee, competitor, customer or investor. Company directors are appointed formally and then registered with the Companies House.

The minimum number of directors in a Limited company is two; their main role is managing its functions.

What do I need to become a director in a company? You don’t need formal qualifications to become a director, but some are helpful.

However, some people are ineligible to serve as company directors:

  • Auditors
  • Bankrupts
  • Anyone disqualified by a court order

The Roles of a Company Director

Shareholders and company directors operate a business.

Although company members (shareholders) have the ultimate control, they don’t participate in managing the company in their capacity. For this reason, they appoint company directors to run the business on their behalf by making all crucial decisions.

Generally, the general director oversees the day-to-day affairs to ensure that the company runs effectively.

The effective running of a company involves adherence to statutory requirements and contractual obligations. But, shareholders will be called upon to approve some exceptional circumstances.

While these two roles are unique, it’s not uncommon for directors to double up as shareholders in a company. In this case, they enjoy additional rights and obligations beyond those afforded directorship. However, it’s crucial to understand these roles are distinct in many ways.

Whether you’re a shareholder, director, or both, here are the roles of a company director.

1. Act Within Powers

Every company in the UK must have Articles of Association (AOS), which help run the company.

What are the articles of association? The articles of association are rules that govern the operations of a company. It includes the powers and roles bestowed on directors, the rights and responsibilities of shareholders and how they make decisions.

Directors must perform their duties according to the articles of association by only exercising their powers for the right reasons.

Most companies supplement the articles with a shareholders agreement, a private agreement clarifying members’ and directors’ roles. These roles include their rights, the extent of authority, and who can and can’t make decisions in certain situations.

For directors to act effectively to fulfil their duties, it’s crucial to understand what is expected of them per the company’s articles.

2. Promote Company Success

A director acting in good faith and within their powers will likely boost the company’s success to benefit all members. It’s a key responsibility to discuss director duties, referred to as the “section 172 duty”.

In this context, “Success” in a company means you work to increase the long-term value of a company. Hence, the directors are responsible for deciding in good faith what course of action is appropriate for the company.

When promoting the success of a company, a director must have regard for the following according to legislation:

  • Long-term consequences that may arise from any decision.
  • Company employee interests.
  • Nurturing business relationships between suppliers, customers, and other parties is necessary.
  • The effects of the company’s operations on a community and environment.
  • The desire to help maintain a high standard reputation of business conduct.
  • They must be fair to members of the company.

Although the list isn’t exhaustive, it highlights specific areas of importance to responsible business behaviour. Directors should go beyond checking these boxes by putting their right foot forward to benefit the company.

The Significance of 172 Duty

As concerns the 172 duty in the interest of stakeholders, it reflects the connection to the responsibilities of many companies. Depending on a company’s size, it should prepare a strategic report that provides shareholders with information on how directors perform in section 172 duty.

Established companies take an extra step and must include a dedicated statement within the strategic report. The statement should describe how the directors have regarded the listed matters when performing the 172 duty.

There’s a debate about how directors should document compliance with this duty in regard to the above-listed factors. Typically, board meetings state that directors have considered all factors when carrying out their duty without discussing individual factors.

If one factor is fundamental to a decision, including it in the minutes is prudent. Similarly, a controversial decision should also be considered concerning relevant factors.

Generally, consistency is the best approach in how the factors are considered in a decision. The lack of detail for a factor can suggest inadequate thought was given to the factors.

3. Independent Judgement

Company directors must exercise independent judgment without allowing their powers to influence or be controlled by others. Hence, company directors must make independent judgements and make their own decisions.

Sometimes, it may be reasonable or necessary to get professional advice, but directors must always be impartial. As a result, they can arrive at decisions independently without the influence or pressure from third parties or personal bias.

Making independent decisions doesn’t prevent a director from acting following the company’s constitution.

4. Exercise Reasonable Care, Skill and Diligence

Anyone can become a company director if they’re of legal age and not limited by director restrictions. The law doesn’t provide specifications, skills, or qualifications to become a director.

However, you must understand that a director’s role carries great responsibility. Hence, any person appointed to become a company director must reasonably display skill and diligence.

In pursuit of the Companies Act 2006, anyone appointed as a director must be able to act like a reasonable individual, with the same level of care, skill, and diligence in:

  • General knowledge, skill, and experience are expected from anyone doing the same duties for the company.
  • The individual possesses general knowledge, skills, and experience.

Everyone is unique, meaning each director has a different understanding and capabilities. Nevertheless, it’s still expected that anyone appointed as a director must perform the duty reasonably and effectively.

5. Steer Clear of Conflicts of Interests

Company directors should steer clear of any situation that can divide their loyalties.

The duty applies to the exploitation of property, opportunities, or information in the director’s interests, directly or indirectly, if they conflict with the company’s interests.

Anytime a potential conflict of interest arises, the other directors (where applicable) must be informed immediately.

Depending on the restrictions of the company articles, the board can authorise the situation. But, if the directors don’t have the power to do so, it’s referred to the shareholders.

When the articles permit a conflicting situation, or the board authorises it or shareholders, the director is expected to act appropriately and promote the company’s success. The role isn’t infringed if:

Examples of Potential Conflicting Situations

The law doesn’t provide a set of rules that can lead to a potential conflict of interest. However, here are some situations that can lead to a conflicting situation:

  • Multiple directorships as a major shareholder, a competitor, the pension scheme trustee company, or the company’s supplier are bound to bring conflicts.
  • Personal interests as a competitor, a major shareholder, a client or a supplier of the company are problematic. Also, if you own a property adjacent to the company’s property, its activities could affect it.
  • Advisory positions in a competitor’s company are a pedestal for conflict.
  • Other profits can be made by using the company’s information or opportunities for personal gain, or you can take up an opportunity declined by the company to make profits as a director.
  • Connected persons like a spouse, parent, partner, child or close family member are involved in any of the above situations.

Steps to Take to When There’s a Potential Conflicting Situation

Conflicting situations may arise in your journey as a director, and here’s what you should do:

Seek approval – Other board members can approve a potential conflict situation. However, if the board can’t authorise or approve conflicting situations, the matter can be referred to the shareholders for approval.

There must be a provision in the articles of association relating to conflict of interests. Some provisions in the articles may include:

  • “Pre-authorised” conflict situations – There might be a list of common situations that could give rise to potential conflicts. Whatever you find in the list allows you to be in a conflicting situation without seeking approval.
  • Conduct provisions outline how you’re expected to behave when you find yourself in an authorised conflict to ensure you don’t breach the company’s duties. Thus, you must act accordingly to serve the best interests of the company by:
  • Guarding the confidential information of a company and the third party.
  • Inclusion or exclusion from board meetings and receiving of board papers.
  • Benefits from an authorised conflict.
  • Regulate your behaviour – Whether a potential conflict situation is authorised or is permitted by the articles of association, a director must still act appropriately. They should do so while bearing in mind that the bigger responsibility is to promote the company’s success—act per the articles of association and terms related to the authorisation.

6. Don’t Accept Third-party Benefits

A director must NEVER accept any benefits from a third party to avoid a conflict of interest.

Benefits are offered on the strength of a director’s position in the company or for not performing or doing something relating to their role.

Such benefits can fuel expectation, suspicion, and misinterpretation, which raise questions about decency and integrity. The conduct will affect not only the director but the entire company. However, the director doesn’t infringe on their role if accepting a benefit doesn’t create a conflict of interest.

7. Divulge Interests in Proposed Transactions or Arrangements

If there is a personal benefit or interest from a transaction or agreement entered by the company, it should be disclosed to the other directors (if any). Sometimes, the information must be divulged to company shareholders.

A good example is when the company is about to enter a contract with a business owned by a director’s family member, spouse or a company where the director has shares. If the transaction doesn’t increase the chances of a conflict of interest or if other directors are aware, there’s no need for a declaration.

8. File and Maintain Statutory Reports

UK company directors have a legal responsibility to file and maintain reports. Some of these reports include:

  • Register the company for Corporation Tax, VAT, Pay As You Earn (PAYE)
  • Preparing Company Tax Returns and annual accounts for HMRC
  • Preparing annual accounts for Companies House
  • Filing an annual confirmation statement with Companies House
  • Paying business taxes on time and in full
  • Keeping statutory company registers and accounting records
  • Notifying any change of company details to Companies House, like the removal or appointment of a director, a new registered office address, or share issuing or transfers.
  • Maintaining company stationery, addresses, and signage

Companies can sometimes appoint a secretary to take up these compliance duties on the directors’ behalf. However, whoever is tasked with the roles isn’t important because the director is the right person to fulfil these obligations.

Directors must ensure all records are current and compliant with the company’s statutory filing requirements.

9. Adhere to Additional Legislation and Regulations

Besides UK company law, company directors might be subject to additional legislation and regulations. These regulations include:

  • Health and safety laws
  • Consumer rights
  • Employment law
  • Trade descriptions
  • Competition law
  • Licensing laws
  • General Data Protection Regulation (GDPR)
  • Environmental regulations
  • Food safety and hygiene
  • Equality and diversity
  • Product Safety
  • Intellectual property
  • Industry-specific laws and regulations
  • Legal requirements in regulated professions

A company director must understand the nature of business and be aware of all laws and regulations a company should comply with. If you need expert help or support, a corporate solicitor will guide you on these issues.

10. Report Personal Earnings

HMRC pays most company directors in the UK through the Pay As You Earn (PAYE) system. Similarly, the same system is used by employers on their payroll.

Directors pay Income Tax, Class 1 National Insurance contributions (NIC) through PAYE and any other deductions from their income.

Many directors receive taxable benefits from their company, while shareholders get dividends. Anytime a director receives an untaxed salary, they must include it for Self Assessment to report and then remit tax on the salary.

A director will be responsible for registering with HMRC, completing a self-assessment tax return annually, and remitting relevant taxes.

Frequently Asked Questions

What are the main duties of a company director?

The main duties of a company director are to handle the day-to-day functions of a company. They make decisions concerning a company to help achieve set objectives. They are responsible for filing a company’s legal reports to the director and are also accountable for shareholders (if any).

What are the rights and responsibilities of company directors?

Company directors have many rights and responsibilities, but one that underlines all is to act in good faith to lead the company to success. They should also act according to the company’s articles of association and exercise reasonable care, skill, diligence and independent judgment in all decisions.

Do company directors own the company?

Directors are appointed to manage a business. A company is owned by shareholders (members) through shares. However, if the company articles of association allow a director to own shares, they can.

Conclusion

Company directors are appointed to the board by shareholders to run a business. The general role of a company director is to make decisions on behalf of a company and manage day-to-day activities geared towards long-term success. Under the Companies Act 2006, the roles of a company director are set out clearly. Besides, a company’s articles of association specify service contracts and shareholders’ agreements that directors must adhere to.

Each company has two or more directors, but the position can vary from one business to another. Do you have any questions about the role of the company director? Kindly contact one of our experts at Incorpuk here.