The employment status of Directors
Directors of a company are not necessarily employees of the company. By virtue of their appointment they become office-holders. A director may however enter a service agreement with the company and become its employee as well as a director.
A director may be removed from office by a simple majority of votes at a general meeting of the company. A director cannot therefore contract for security in office. There is however nothing to prevent the director from contracting a secure term of employment as an employee rather than as a director. If a director is removed from office, the director may then have an action for breach of the contract of employment.
Appointment, retirement and resignation of a director
A private company must have at least one director and a public company must have at least two directors—this is the minimum number of directors required by the Companies Act 2006 but the company’s articles of association may require it to have more.
The appointment of a director is governed by a company’s articles of association, subject to some exceptions.
Once appointed, a director may:
- retire from office (if the company’s articles of association provide for a director to retire)
- resign from office, or
- be removed from office by an ordinary resolution passed at a general meeting in accordance with the Companies Act 2006 or pursuant to a mechanism in the company’s articles of association
A company’s articles of association may also set out circumstances in which a director will automatically cease to hold office.
Companies House must be notified of a person becoming or ceasing to be a director and the company’s internal records must be updated.
A director of a company is not automatically entitled under company law to remuneration, by virtue of holding office as director. The constitution of a company must give the directors power to pay remuneration for their services.
There is a distintion between:
- a director appointed under the Companies At 2006 who is not also an employee of the company and has not entered into a service contract with the company (and therefore the director’s entitlement to remuneration rests upon the articles of association of the company), and
- a director appointed under the Companies Act 2006 is an employee of the company and is employed pursuant to a service contract with the company, under which the director may be contractually entitled to remuneration
Transactions involving directors
The Companies Act 2006 sets out four types of transactions with directors that require member approval:
- long-term service contracts
- substantial property transactions
- loans, quasi-loans, credit transactions and related arrangements, and
- payments for a director’s loss of office
Approval is required for such transactions because they involve directors and are considered to be particularly open to abuse.
Non-executive directors
A main principle of the UK Corporate Governance Code is that the board and its committees should have the appropriate balance of skills, experience, and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively.
The board should include an appropriate combination of executive and independent non-executive directors such that no individual or small group of individuals can dominate the board’s decision taking.
As part of their role as members of a unitary board, non-executive directors should:
- constructively challenge and help develop proposals on strategy
- scrutinise the performance of management in meeting agreed goals and monitor the reporting of performance
- satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are robust and defensible, and
- determine appropriate levels of remuneration of executive directors and have a prime role in appointing and, where necessary, removing those executive directors