The board of directors of a company is the driving force behind every business and creating a well-functioning board should be top of every entrepreneur’s to-do list. The board is responsible to the shareholders of a company and manages the company’s day-to-day commercial operations. Typically, the board is led by the Chief Executive Officer or Managing Director, with a team of individual directors responsible for certain operational areas like ICT and finance. So, how do you go about appointing directors, who can be a director, and what are the corporate governance requirements for putting a board of directors in place?
- Who appoints a board of directors?
- What are the eligibility criteria to become a director?
- How boards of directors are appointed
- What documents are required to appoint a director?
- What are the filing requirements when appointing a director?
- Are there any other rules that need to be followed?
Who appoints a board of directors?
The rules governing the appointment of directors are found in both the general law and the company’s Articles of Association. If you’re thinking of appointing a director, it’s important to look at the Articles and make sure you understand how the procedure works. Directors are normally appointed by the company’s shareholders, or the board of directors itself. If the board makes a director’s appointment, it’s possible that the shareholders have to confirm the appointment.
What are the eligibility criteria to become a director?
Aside from a person’s general competence to fill the role you have in mind for them, there are various criteria that must be satisfied before a person can become (and remain) a director:
The minimum age that someone can become a director is 16, and there is no maximum age.
While companies must have at least one individual on the board, a company or a Limited Liability Partnership (LLP) can also be a director of another company.
Unless specifically approved by the court, an undischarged bankrupt and certain people who are involved in ongoing bankruptcy or insolvency proceedings can’t become directors. In addition, if you’ve been a director of a company that has gone into insolvent liquidation, you can’t be a director of a company with a similar name within twelve months of those proceedings.
In some cases, a court may decide to issue an order preventing someone from becoming a company director or being involved in its management. These are some examples where the court may make such an order:
- Where that person has previously been convicted of an offence in connection with the management of a company or its property, including in connection with a company’s winding-up.
- Where that person has been in default or committed an offence in terms of failure to make necessary filings at Companies House.
- Where someone has been convicted of certain foreign offences in connection with the management of a company.
- Where that person has been a director of an insolvent company and their conduct at that time makes them unfit to be a director, or if they’ve been investigated by the Secretary of State in connection with their management of a company.
The statutory auditor of a company can’t also be a director.
Listed company directors
For listed companies, the UK Corporate Governance Code for financial years beginning after 1 January 2019 states that:
- The board should contain a mix of executive and non-executive directors.
- At least half the board, including the chair, should be independent non-executive directors.
Number of directors
A private limited company must have at least one director, and a public company must have at least two directors. While the law doesn’t dictate the maximum number of directors on a board, the Articles may.
How boards of directors are appointed
For someone to be appointed to the board of directors of a company, they must first of all agree to be a director, and their consent will be included with the forms filed at Companies House.
When a company is first set up, the company will deliver a form to Companies House notifying it of the identity of the first directors and including their consent to act. Thereafter, the appointment of directors will usually be governed by the Articles, and as we’ve seen, be made by the shareholders or the board.
If there is a vacancy at any time, for example if a director resigns or is removed, the board can usually make an appointment to fill the vacancy, rather than waiting for the shareholders to make an appointment, although that person will only hold office until the next shareholder Annual General Meeting.
This is the procedure for making a new director appointment:
- The existing board will usually meet to discuss the appointment of a new director and decide what person they are looking for. Unless they have someone in mind, they will start a recruitment process.
- The board will decide the terms and conditions of the director’s appointment, their compensation package and any incentives such as EMI share schemes that will be offered. If the contract contains more than a two-year notice period to be given to the director, then the members must approve it.
- Read the Articles to make sure you stick to the process described for the appointment of directors. The procedure is normally for the board or the shareholders to sign a resolution making the appointment, and the Articles may contain provisions that require more than 51% of shareholders to agree to the appointment.
- Decide the successful candidate.
- Hold a board meeting to formally make the appointment or call a general meeting of the shareholders to approve the appointment.
- Provide Companies House with a copy of the director’s written consent to be a director, and details of the date of the director’s appointment, their full and previous names, date of birth, occupation, nationality, residential address and address for service of notices. This information is included in Forms AP01 or AP02 (if the director is a company) and must be sent to Companies House within 14 days of the appointment.
- Update the company registers.
What documents are required to appoint a director?
As a director will normally be an employee of the company (unless they are a non-executive director), they will have a contract of employment with the company known as a service agreement. If they are a non-executive, they are appointed with a letter of appointment.
What are the filing requirements when appointing a director?
A company must keep two registers, a register of directors containing the directors’ personal details and a register of director’s residential addresses. These registers must be open to inspection by the public and you must tell Companies House where the registers are kept.
Within 14 days of making a new appointment, removing a director or changing a director’s details, you have to file a notice with Companies House.
Are there any other rules that need to be followed?
If you want to remove a director, you should check the company’s articles to see what procedure to follow. This may be by board decision, or by shareholder resolution. You should also check the terms of the director’s contract, and make sure that you carry out the correct dismissal process.
Sometimes a company’s Articles will require directors to retire by rotation, so that a third of them resign every year, and must be re-appointed by the shareholders.