Article

What’s the difference… Directors

13th July 2023

Introduction

A company is always run by its directors, acting for the most part by majority decision. The level of responsibility or influence a director will have on the company will depend on what type of director they are. So, what types of directors are there? Do they have different responsibilities or liabilities?

The two most recognisable terms are Executive and Non-Executive directors. It’s important to note that there is no legal difference between an Executive and Non-Executive Director, both commonly referred to as “statutory” directors: their duties and responsibilities to the company, its shareholders, employees and creditors are the same.

These two terms are used to distinguish between directors who are involved in the day-to-day management of the company and directors whose role is more about independence and providing a corporate governance check on how the company is being run.

Executive Director

Executive Directors are responsible for day-to-day management of a company and development of its strategy and growth. Executive Directors have a great deal of involvement in the company. They are usually appointed by the board, are members of the board and are normally employees of the company as well.

Employed Executive Directors owe the company both duties as a director and additional duties under their employment contracts. They will/should have an intimate knowledge of the business and must be able to strike a balance between their conflicting duties. It’s essential they think both operationally and strategically. An example of an Executive Director would be a Managing Director or a CEO.

Non-Executive Director

In contrast, Non-Executive Directors don’t get involved in the day-to-day operations of the company. Instead they offer independent advice and their responsibilities generally include monitoring Executive Directors and acting in the interests of the stakeholders. Non-Executive Directors are appointed by the board and are members of the board (as for Executive Directors) but they won’t be an employee of the company.

They usually receive a fee for acting as a director under a non-executive appointment letter. The role of Non-Executive Director is important for growing companies as it offers a unique, unbiased perspective and constructive challenge to decisions made by the Executive Directors, which requires strong leadership and decision-making skills.

De facto Director

A ‘de facto’ director is someone who acts like director, assuming the role and responsibilities, but who hasn’t been formally appointed as a statutory director. Whether a director is acting as a de facto director depends on several factors but generally they will be acting in a senior position which involves making decisions on behalf of the company or holding themselves out to be a “director” of a company. A de facto director is subject to the same statutory duties and liabilities as a statutory director.

Shadow Director

A shadow director is a person whose directions or instructions tend to be followed by the statutory directors of the company. They act ‘behind the scenes’ influencing the decisions and direction of the company and owe statutory duties in relation to the directions and instructions they give to other directors.

Both de facto and shadow directors are subject to the general duties of directors set out in the Companies Act 2006, can be liable for wrongful trading under the Insolvency Act 1986 and can be disqualified from acting as a director in the same way that applies to statutory directors.

If you would like more information about the different types of directors and their duties and responsibilities, please get in touch.