“It’s the pinnacle of your career, confirmation that you are at the top of your game. But are there any downsides?
Being a director of a UK company comes with some heavy responsibilities. Under the Companies Acts, directors are personally subject to statutory duties. There are 7 general duties, including, a duty to promote the success of the company for the benefit of its members, a duty to exercise reasonable care, skill and diligence and a duty to avoid conflicts of interest. One very practical duty is the responsibility of directors to ensure that the company maintains full and accurate accounting records. This is a greater burden than some realise.
Directors may also incur personal liability for their actions (or omission to act). If they consistently mismanage a company or are guilty of wrongful or fraudulent trading, they can be disqualified from acting as a director for up to 15 years. If a company becomes insolvent and the directors knew (or ought to have known) that there was no reasonable possibility that the company could avoid liquidation, the directors may be required to make a personal contribution to the company’s assets. This is also the case where a director is involved with a company operating with the intention of defrauding its creditors. Directors can also be personally liable under health and safety law. Board members have both collective and individual responsibility for health and safety matters.
So, if you’re invited to become a director of a company, what should you do? The answer will vary from company to company but here are some essentials:
- Ask for a description of your new role, with a list of day-to-day responsibilities (if any).
- Find out about the other directors and the senior management team. Are they up to the job? Where does your role fit into the overall management structure?
- Obtain an up-to-date business plan, together with present and future budgets.
- Obtain copies of management accounts for the current and previous financial year. Are they well prepared, informative and produced on a timely basis? What do they tell you about the financial and trading position of the company?
- Who are the company’s principal shareholders? What influence do they exert on the company? Is it a healthy influence?
- Obtain copies of minutes of recent Board Meetings (say, the last 6). Are they informative? Are actions clearly highlighted and followed up?
- Ask for details of any ongoing or potential litigation. What impact is this likely to have on the company’s business and profitability?
- Find out what insurance policies are in place, including insurance for directors and officers.
- Ask for a copy of the company’s memorandum and articles of association so that you know what the company is legally empowered to do
This is not an exhaustive list but the information should help you to make an informed decision as to whether to accept the directorship.
Jeremy Kirk is an Associate Director of SouthWestFD, providing growing businesses in the South West with high value financial management support to enhance their profitability.