Decisions before deciding to become a director

Would you like to become a director? Think carefully, why would anybody want to become a director?

Directorships bring risk, responsibility and no privileges!

Companies need directors to constitute a board and to direct their operations.

But why would anyone choose to become a director?

Let’s get one thing straight first. Becoming a director?has no relation with owning shares; you can be a director without owning shares, and you can own shares without becoming a director.

There are three elements in a company:

·? the company?itself

·? the shareholders

·? the directors

And these are entirely independent.

In addition there is a whole range of stakeholders?to consider.

Health risk

The next thing for you to understand is that limited liability?applies to the company; it does not apply to the directors. It is important that you understand this and ensure that your board keeps proper records and follows proper processes and procedures.

Although in most cases it will be the company that takes – or does not take – actions that put it at risk, there are certain circumstances when that risk can pass to the directors.? It is important that you take steps to ensure that you are aware of such risks and protect yourself by properly considering the implications of decisions and by keeping proper minuted records of both the board’s considerations and their decisions.

If you disagree with a decision, even if you are outvoted, you can still be liable for the results. Make sure that your objection?is recorded!

Your biggest risk?is likely to be financial.? The board must ensure that it can reasonably expect to be able to pay its creditors. The board must be constantly vigilant about wrongful trading, overtrading or trading fraudulently.

It is an offence for a company to continue to trade while insolvent. Further, it is also an offence to enter into an agreement where doing so would result in the company becoming insolvent; if it does, then the directors can become personally liable for those debts incurred after the date that it became insolvent.

Should a company get into financial difficulties?the board is expected to minimise creditors’ losses, and should take legal and/or financial advice on the best and most prudent courses of action.

As a director?you should at all times be able to demonstrate that the board has been exercising reasonable care, skill and diligence and that the directors have had regard to the likely consequences of any decision in the long term.

Directors can also be liable if the company fails to implement proper processes covering:

• Health and safety
• Employment law
• Control and disposal of hazardous waste

In the UK a director?may also be liable for failure by the company to make required filings at Companies House.

You can mitigate these risks by taking out professional indemnity insurance and learning to become a professional and effective director. Further, you should exercise your right to obtain professional advice, either from company officers or from independent professionals.

Beware?

You don’t even need to become a formal director to be at risk.

The UK Companies Act simply defines a director as including any person occupying the position of director, by whatever name called.

A ?de facto?director?is someone who has not been legally appointed and notified to Companies House as a director but who nevertheless acts as a director and holds them self out to third parties as a director. ?

The matter is determined on an objective basis and irrespective of the person’s motivation or belief. There is no definitive test to determine the issue and all relevant facts need to be taken into account in determining whether or not you will be deemed to be a de-factor director.

It is the role of the individual, rather than the title used that determines whether an individual is a director or not. The ?de facto director will usually carry out all the duties of a director and can make the decisions of a director, sign company documents and be treated as a director by other directors.

The?de facto?director is subject to the same?legal duties, responsibilities and potential liabilities?as?de jure?directors and will be treated as such by the courts in the case of a dispute.

Relevant factors they will consider include:

• Whether there were other persons acting as directors
• Whether the individual has been held out as acting as a director, including using the title director in communications, or has been considered to be a director by the company or third parties
• Whether the individual was part of the corporate governing structure
• In what capacity the individual was acting

Acts of a de-facto director can include:

• Accepting responsibility for the company’s financial affairs
• Actually as sole signatory for the company bank account
• Negotiating with third parties on behalf of the board
• Recruiting and appointing senior management positions

You can also take on the liabilities of a director?unknowingly by becoming what is known as a ‘shadow director’ if the directors of a limited company are accustomed to acting in accordance with your directions or instructions. However, professional advisors giving advice in their professional capacity are specifically excluded from the definition of a shadow director in UK companies legislation.

Make sure that you are clear about your status.

The good news

I have deliberately put the bad news and the warnings right up front, because very often people choose to become directors for the wrong reasons and with a fair degree of naivety. After all, ‘director’ has a certain kudos, and it looks good on your business card.

Appointment as a director?can be a natural stage in your career development and an exceedingly rewarding activity.

Directors are involved in an organisation at a higher, more strategic level.? They have greater leverage and can make a greater contribution.

It can also, of course, be financially rewarding; you should expect some compensation for your expertise, experience and the additional risk?that you take on.

Here are some reasons for becoming a director quoted in the Harvard Business Review:

• Sitting on a board serves as an important signal, or “seal of approval” for an executive
• Board service is an avenue for an executive to gain access to unique knowledge, skills and connections
• Serving on a board increases an executive’s likelihood of being promoted as a first-time CEO to an S&P 1500 firm by 44%
• Even if they aren’t promoted, serving on a board boosts an executive’s subsequent annual pay by 13%
• A board appointment is a strong signal that this leader has potential

“Ultimately board service is a key professional development tool in grooming potential CEOs that executives and boards alike are beginning to recognise and value.”

Richard Winfield is the author of The New Directors Handbook, creator of The Essential Directorship and Strategic Company Secretary masterclasses and curator of the CPD 2.0 Professional programme, which provides a stream of governance alerts and management insights. He teaches corporate governance internationally to directors, boards and corporate secretaries and provides personal career coaching and assistance in preparing effective job applications, supported by comprehensive online assessments.

Clients approach Richard to help bring structure and clarity to their lives - and to get onto the short list for their dream job.

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