If you are thinking about appointing a new director then there are some important point you really do need to consider before you go ahead.
You can ask anyone to help in your company, and you can employ anyone you like (within reason) but a directorship of a limited company in the UK is a different matter as there are legal restrictions as to who you can appoint and requirements you have to meet.
So in this post we are going to highlight the most important things you need to think about when appointing a new director including;
- Why you need to consider directorships carefully
- What job will your new director do?
- Appointing a new director – are they the right person?
- What does the Articles of Association say?
- Have you spoken with the board about appointing a new director?
- Appointing a director – what forms do you need?
- Your new director checklist
Why you need to consider directorships carefully
It is vital to remember that a directorship in a limited company is a legal position and with that come rights and responsibilities.
Bear in mind that we are not talking about honorary or customary titles here. For instance someone may be called a “Creative Director” in an advertising agency or a “Director of Clinical Medicine” in a hospital but unless they are formally appointed they are not really directors.
What we are talking about here is someone who is registered with Companies House as a company director of your business.
A company director is responsible for acting in the best interests of the company and has to abide by its constitution at all times. They will be required to be mindful of the impact of its operation on the employees and the environment in which it works.
Company directors can sign paperwork on behalf of your company so you need to know that they are trustworthy.
They can also be held legally responsible for the actions of the business and may find themselves on trial where a company employee breaks the law or they may be financially liable for some debts that the company incurs.
Therefore it is important that you choose your new director with care.
You can find out more about directors’ responsibilities here.
1 – What job will your new director do?
This is perhaps the most fundamental question and certainly the very first one you should ask yourself.
What gap are you proposing to fill by appointing a director and why a directorship instead of just being an employee?
We are perhaps considering the difference between whether you can appoint a director versus whether you actually should appoint one.
Directors generally play a very distinct and important role in a business. They bring with them skills and experience that will help steer the company and allow it to achieve its aims.
So this means that you should appoint a director when you have a clear need for strategic input in those particular areas.
Typically larger companies will have directors that cover very specific and creal areas of responsibility such as finance, marketing, legal and HR. It is much less common that an executive director will be appointed with no clear brief.
It’s a really bad idea to appoint someone as a director just because you like them or because they have stuck around for a long time. Directorships should be key positions handed to people who will drive your company forward and not as a reward for loyalty.
2 – Appointing a new director – are they the right person?
If you know what job your new director is going to do, then you have a head start in understanding who you may want to appoint.
It is usual to appoint a Chartered Accountant, or at least someone who has significant financial experience as a Finance Director.
So the first question here is whether the person has the skills that you need.
The second question is whether they have the experience. As an example, you wouldn’t usually appoint a marketing director who had only just finished their degree.
You will be looking for directors who can bring the benefit of their experience to the board and people who the rest of the company can look up to and learn from.
You will also need to think about personal dynamics. They may have all of the skills and experience you need but if they are a bully who ends up forcing your people to leave then they are probably not going to be a good fit!
You also need to consider their background. It is too easy to appoint someone as a director who turns out to have skeletons in their closet.
Most companies will do some form of background check into their executives before they appoint them as criminal convictions or unsavoury opinions on social media could end up being incredibly embarrassing for the business.
Legally your new director candidate must be over 16, cannot have been disqualified from undertaking the role of director, must not be bankrupt and cannot be the company’s auditor.
3 – What does the Articles of Association say?
Once you have identified the job that they will do and you have a candidate in mind you’ll need to consult the company’s Articles of Association.
The articles are the rulebook by which the company is governed and this document will have specific clauses about who you can and can’t appoint as a director, how many you can have and things like their length of service.
Don’t appoint a director without checking this because it could end up in a difficult situation.
The model articles that are used by many companies state that approval of the appointment can be achieved by a simple majority decision at the board meeting which is a fairly easy matter if you are a single director business.
However many companies have bespoke articles and these may have specific provisions not only about the type of person you are allowed to appoint but also the method that you use to go about it.
If you have external funders or investors then they may have a say in who can be appointed and what size the board of directors is allowed to be so check also any agreements you have made.
4 – Have you spoken with the board about appointing a new director?
We wouldn’t advise turning up at a board meeting and springing on the current directors a totally new plan to appoint an addition.
Instead it always makes sense to speak with people privately and explain your plan first. After all, you will need to get the approval of the board at a formal meeting so it is a smart move to gain informal approval first.
Do this early on when you first identify a gap and you may find that they have excellent candidates in mind who would prove to be valuable additions to your board.
Often, venture capital or private equity businesses will have specific rules about appointing extra directors and you may need to speak with them privately in advance too. Be prepared for them to want to meet your candidate before the board meeting at which they will be appointed.
5 – Appointing a director – what forms do you need?
Onto the admin side now and the very first thing you will need is a written confirmation from the new director of their willingness to serve.
This is a signed and dated document that shows you have the authority to appoint them as a director. After all, directors have legal responsibility and it wouldn’t be a good idea to be able to appoint people without their knowledge and consent.
If you haven’t done it before then you should do your background checks now and as a director is a paid office holder you will also need to check their right to work in the UK.
You will also need a service contract for your director. You should have these for your board anyway but if you haven’t appointed any directors before then this will need to include;
- The name of your company
- Appointment start date
- Notice period required to terminate the directorship
- Details of their statutory duties.
- Details of their pay, including benefits and review date
- Any commission or profit-sharing arrangements
- Compensation due for early termination and loss of office
Usually you would expect a new director’s service contract to be approved by the board of directors and if it is for two years or more then section 188 of the Companies Act 2006 requires that the contract be ‘approved…by [ordinary] resolution of the members of the company’.
Once you have done this then you’ll need to update your company register of directors.
Your new director appointment checklist
- Have you a service contract for your new director?
- Have you checked the Articles of Association?
- Has your board agreed to the appointment?
- Do you have a written Consent to Act
- Have you checked right to work?
- Have you got director’s insurance?
- Have you asked them to complete form AP01 or AP02?
- Have you updated the register of directors?
Seems like a lot of work?
Appointing a director isn’t something you should do lightly and so it pays to adopt a methodical approach.
Understanding what gap you are trying to fill and then choosing the right person to fill it is important as is making sure you have the right to do so under your articles.
We know that our clients just want to get on with the business of running their company and so we’re happy to help with any aspects of appointing a new director.
Call us now and we’ll be happy to help.