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A director is defined in law according to what they do, rather than their actual job title. Even a person not formally appointed to the board might be deemed a director if their role could be considered equivalent to that of a director, or if they have acted as a director. This is known as a de facto director. .

Directors' duties

Directors are responsible for ensuring the success of the business and compliance with relevant regulations - such as health and safety, employment law, tax, and corporate governance. .

Types of company directors

There are two types of director, executive and non-executive. There is no legal distinction made between executive and non-executive directors - the difference is that non-executive directors do not get involved in the day-to-day running of the business.

Executive directors

Executive directors perform operational and strategic business functions such as:

• managing people
• looking after business assets
• hiring and firing staff
• entering into contracts

Non-executive directors

Non-executive directors use their experience and expertise to provide independent advice and objectivity, and they usually have a role in monitoring executive management. A non-executive director might be appointed to carry out a specialist role on a part-time basis or for their expertise in specific activities, such as strategy and contract negotiation.

They usually work part-time, attending board meetings and spending time on specific projects.

Non-executive directors bring an objective view of the business, can improve the board's effectiveness at relatively low cost and provide valuable business connections.

The employment status of company directors

A director is an officer of the company.

Many directors work under a contract for services and are therefore paid a fee. In these circumstances, they would be regarded as self-employed.

However, it's possible for them to work for you under a contract of service, making them an employee. If so, you must pay them a salary and make deductions through the PAYE (Pay As You Earn) system. However, National Insurance arrangements are different for directors compared to other types of employees.

Note that directors who are employees will also benefit from certain employment-protection rights not available to non-employees, eg, the right to claim unfair dismissal.

One director

Start-up companies often have one director, the minimum required by law for a private limited company. The director may also be the main shareholder and the person who runs the business.

Board of directors

However, as the business grows, a single director may not have enough time to cover all their responsibilities. In this situation, the business may decide to appoint a board of directors, with each director taking responsibility for a certain part of the business, eg, human resources, finance, sales and marketing, or IT. .

If you appoint a board of directors, you should ensure they fall within a clearly defined reporting structure. For example, the sales and marketing teams could report to a sales and marketing director who is responsible for strategy in that area.

Board structure

Typically, a larger company might have a board structure as follows:

• A chairman - often non-executive - who oversees the whole business.
• A managing director - employed by the company - who runs the business and draws a salary. The managing director reports to the chairman and oversees the board of executive directors.
• A team of three executive directors, who sit on the board, draw salaries and manage key areas of the business, such as finance, sales, and operations.
• Two non-executive directors - who advise on the strategic direction of the business and decide the remuneration of executive directors. They may be paid fees.

Benefits of a clear board structure

Having a clear board structure allows shareholders to understand the roles of and reasons for appointing executive and non-executive directors. It is a good idea to have a senior, independent non-executive director as a point of contact for shareholder grievances.

Staff need to know who is responsible for which business areas and who they can go to if problems arise. In smaller companies, staff may well work alongside directors but as the company grows they may have less day-to-day contact.

Choosing the right company directors is essential for business success. They can be expensive, so they must add significant benefits, values, and skills to the business.

For example, if you run a technology business but don't have a marketing background, it makes good business sense to choose a director with marketing skills.

Determine the skills your business needs from directors

You could create a chart to determine what skills your business needs to move ahead and grow. List the skills that your management already has and those you need to bring on board. Identify your ideal selection criteria, eg, x years' experience in y industry, qualified to z level etc.

Ideally, directors will:

• bring new and specialist skills and expertise, or a deep understanding of the business's product or market
• be able to lead and motivate staff
• be suitable for representing the business at industry events, customer meetings, and shareholder briefings
• have a network of contacts within the industry and introduce potential partners and customers to the business

Choosing the right person to join the board can help ensure that it will make decisions that will encourage the long-term security and success of the business.

Choosing non-executive directors

When choosing non-executive directors, there are other qualities that are worth looking for, including:

• independence of mind
• impartiality
• wide experience
• proven business acumen
• good judgement

It is important to consider the balance of skills, experience, and personalities when putting together a board of directors. It is also worthwhile considering whether potential directors will fit in with the existing business culture.

When appointing a director for your business, you might be tempted to appoint someone from among your network of industry contacts, eg, from businesses that you partner or trade with.

However, it is very important that you choose the right talent for your business, rather than just someone you like. Therefore, the most effective method of appointing directors is to follow the traditional recruitment process by:

• putting together a job description and job specification
• advertising the position through the normal recruitment channels, eg, the financial or trade press
• shortlisting applicants
• selecting the appropriate candidate via assessment, eg, interviews, tests

See recruiting staff and how to advertise a job.

Using an employment agency to find directors

You could consider using a 'headhunter' - an employment agency that specialises in helping businesses recruit company directors.

Headhunters offer services such as:

• designing job specifications
• running assessment centres for candidates
• shortlisting candidates for interviews
• conducting first interviews
• coaching on running effective boards

Be aware that headhunters' fees can make the recruitment process expensive.

Shortlisting and testing candidates

If you decide to recruit without the help of an employment agency, you should certainly interview shortlisted candidates. However, you might also consider testing them using, for example, an assessment centre.

For advice on the recruitment and selection process, see advertise a job vacancy.

Make sure you select a company director on the basis of merit, and not because of personal relationships or share ownership in the company. Check their references carefully. See appointing and paying company directors for information on involving all directors in the decision-making process.

It's a good idea to keep your board of directors as small as possible, especially in the early stages of your business's growth - the smaller your board, the more effective it is likely to be.

However, if you are preparing to float your company on the Stock Exchange, you may need to recruit additional company directors as flotations can take up a lot of management time.

The details of the appointment of company directors are typically set out in a company's articles of association - see memorandum and articles of association. These may impose restrictions on, for example, the number of directors or the length of their service.

If your business's articles do not cover directorial appointments, you should nevertheless have written procedures for appointing company directors.

You also need to comply with certain legal requirements when making appointments and check that the candidate is not a disqualified director. .

It is considered best practice to involve all existing directors in the appointment of any new company directors, although some businesses set up nomination committees to handle this.

Large shareholders, particularly venture capitalists, may demand board representation in return for investment. They usually take a non-executive position, and can provide plenty of advice based on their experience with growing businesses.

Paying company directors

The issue of remuneration needs to be handled carefully. Clearly, each director's level of experience will be a factor in deciding their rate of pay. Executive directors receive a salary, while non-executive directors may receive a salary if employed or receive fees if self-employed.

You may decide to include shares, share options, pension provision, company cars, or incentive schemes in directors' remuneration packages. For information on remuneration, see how to set the right pay rates and implement staff incentive schemes. You will need to consider the tax implications of these types of remuneration.

It is considered good practice to have executive directors' pay decided by the non-executive directors to avoid any conflict of interest.

You should help your new company directors be as effective as possible from the moment they start, so they can use their skills and experience to improve and grow your business.

You can do this, for example, by providing induction programmes, running training courses, setting objectives, and carrying out performance appraisals.

Providing induction programmes

Having a comprehensive and formal induction programme can help new directors understand - and fit into - the culture of your business. See advantages of job inductions and preparing for an induction.

Training courses

Even though your company directors will bring talent and knowledge to the business, you will need to address any shortcomings you identified in the recruitment and selection process.

Providing training courses for your directors is one way of helping them extend and refresh their knowledge so they can bring additional skills to the board.

You may also wish to help them learn other skills, such as project management, public speaking, or specific IT skills. See staff training and skills and training for directors and owners.

Setting goals and targets

You should set business objectives for your directors that are SMART (specific, measurable, achievable, realistic, and timed) and that are linked to key performance targets for the business.

If non-executives are fee-paid, include objectives in their service contracts. You may wish to relate part of their pay to the achievement of these objectives.

Carrying out performance appraisals

One way of assessing a director's progress and recognising their achievements is to carry out a formal appraisal of their performance.

See manage staff performance.