The different types of company directors

Company directors (or board members) are typically nominated by a nominating committee, but they can also be nominated by a company’s shareholders.

Company directors – board members – fall into two major categories: executive directors and non-executive directors.

The big difference is that non-executive directors do not participate in the day-to-day operations of the organisation.

While executive directors are responsible for such things as running the business, recruitment, managing people, and entering into contracts, non-executive directors are there to provide advice to the board.

“Non-executives (or NEDs) have been described as ‘critical friends’ to the CEO and the executive directors,” says David W Duffy, CEO of the Corporate Governance Institute. “They are recruited by a board of directors to offer expertise from an ‘outsider’s’ perspective.”

All the members of a board are typically nominated by a nominating committee, but they can also be nominated by shareholders.

Aside from executive and non-executive directors, there are other categories into which company directors may fall. A de facto director, shadow director, nominee director, and alternate director are all examples of this.

A de facto director has the same responsibilities toward the company as a regular director.

Although not officially appointed to the board, de facto directors assume the role of directors. For example, they sign contracts, make decisions, and appear to third parties as a director on behalf of the company.

A de facto director has the same responsibilities toward the company as a regular director.

Companies should be careful and diligent when appointing shadow directors.

The term shadow director one of the types of directors refers to any individual appointed by the company (aside from professional advisors) whose directions must be followed by the other directors.

• Shadow directors are determined by their influence over the company’s operations.
• Companies should be diligent when appointing shadow directors and ensure that all legal requirements are met.
• A breach of directors’ responsibilities can result in harsh penalties, and the lack of a formal appointment does not necessarily protect a shadow director.

The appointment of a nominee director can occur for many reasons.

Nominee directors represent the interests of stakeholders or stakeholder groups (nominators) on a company’s board. Nominators appoint them to safeguard their interests.

However, regardless of its appointment by a specific stakeholder, a nominee director is not relieved of his general duties as a director of the company.

The appointment of a nominee director can occur for many reasons, including:

• Nominee directors may be appointed under the Articles of Association (AoA). Often, partners in a joint venture can appoint their nominees to the board of directors.
• If a financial institution gives a substantial loan to a company, its nominee directors are generally appointed to the board of directors to ensure the lenders’ interest is protected.
• When a party invests heavily (in the form of shares or otherwise) in the company, the investor is entitled to nominate a director to the board of the investee.
• A stakeholder may be granted such a right through a contractual arrangement between a company and themselves.
• In cases where the statute specifically provides for the appointment of nominee directors to the board.

In the absence of the principal director, the alternate director has the same power as the principal director.

When another director cannot attend a board meeting, an alternate director may be appointed in their place.

In the absence of the principal director, the alternate director has the same power as the principal director.

These types of company directors should receive all meeting and committee notes that the principal director would receive.

They should be able to fulfil all their duties while the principal director is away.

In the same way as any regular director, the alternate director is personally responsible for their actions.

If you have an interest in becoming a company director, you can download this brochure to learn more about the Diploma in Corporate Governance.