Benefits \ Disadvantages of making someone a Director?

[amaze]

Hi,

What are the benefits and disadvantages (to the company) of making a member of the senior management team a director?

I am currently the only director and shareholder and have considered making some of the SMT directors, but only if its advantageous to the business.

Thanks

 

[Free Lance]

There are no immediate advantages to you unless the promotion is seen as incentivising the staff. From a company law point of view, the directors take the day to day decisions for the company and they can do so by voting on one man, one vote basis.

What you don't want to happen is for the newly promoted managers to suddenly control the board because they outvote you! Anyone with more than 50% of the shares can remove a director (with some exceptions) but you don't want to go down that route unnecessarily.

From the manager's point of view, they might get a new title and a better view of / input in what happens in the business but they do not get any more money and suddenly become subject to a load of obligations/duties which they will hold as directors.

What the managers might want are shares in the company so that they get a share in the dividend. That is more valuable than a directorship. If you want to do that then there are tax efficient incentive schemes out there which are the best way to incentivise senior employees.

As soon as you are ready to introduce new management (directors) or new shareholders (owners) then you should have a shareholder agreement in place. This is especially true if you give shares away. Unless there is a provision in the shareholders agreement, once the shares are given to someone they are his to keep forever. The manager might leave but 15 years later on he will still hold a share in the company and be eligible to receive dividends!

There are simple agreements you can put in place to protect yourself from future problems with minority shareholders/directors. Have a look at the legal section (or under my login) and you will see that its quite a common problem.

PM me if you need details of a decent lawyer to help you out.

Good luck

 

[amaze]

There are no immediate advantages to you unless the promotion is seen as incentivising the staff. From a company law point of view, the directors take the day to day decisions for the company and they can do so by voting on one man, one vote basis.

What you don't want to happen is for the newly promoted managers to suddenly control the board because they outvote you! Anyone with more than 50% of the shares can remove a director (with some exceptions) but you don't want to go down that route unnecessarily.

From the manager's point of view, they might get a new title and a better view of / input in what happens in the business but they do not get any more money and suddenly become subject to a load of obligations/duties which they will hold as directors.

What the managers might want are shares in the company so that they get a share in the dividend. That is more valuable than a directorship. If you want to do that then there are tax efficient incentive schemes out there which are the best way to incentivise senior employees.

As soon as you are ready to introduce new management (directors) or new shareholders (owners) then you should have a shareholder agreement in place. This is especially true if you give shares away. Unless there is a provision in the shareholders agreement, once the shares are given to someone they are his to keep forever. The manager might leave but 15 years later on he will still hold a share in the company and be eligible to receive dividends!

There are simple agreements you can put in place to protect yourself from future problems with minority shareholders/directors. Have a look at the legal section (or under my login) and you will see that its quite a common problem.

PM me if you need details of a decent lawyer to help you out.

Good luck

Hi,

Thanks for your great reply.

There is no issue to asking for equity as its already been made clear this isn't an option currently, but maybe in 18 months. I am the 100% shareholder and will continue to be. It was just the director status.

So in short no real benefit for the business at this stage?

Thanks

 

[Free Lance]

Probably not. If there's no more money or effective control then the only benefit for the manager is a fancy title. From your point of view you would may find yourself having to wield your power wearing a shareholders hat rather than as you currently do as the sole director - its a bit more clunky.

OK. No shares now. How about an option scheme with an exercise price that is low enough to incentivise the employee but high enough to force them to hand over cash before becoming a shareholder. You can set the exercise period some time in the future, e.g. the 18 months you mention. No one gets any shares for 18 months and when they do they have to pay a little bit for them?

 

[CreatorChip]

I have the same kinda question. I originally thought I'd need to register my business as a NFP. I managed to find some potential directors who are both keen and will make useful contributions, but I've since had advice convincing me that we needn't be a NFP. So my non-exec is wondering why I still want these others to be directors.

My thought is that it will add some legitimacy and/or credibility to the company. My business does something a lot of sole traders do, but I'm wanting to do it bigger and better. If I'm named as the sole director, though, any customer looking into that sorta thing will start to compare the business more closely to those sole traders. If they see there's a whole board of directors, those same customers will see that this is a bigger organisation, where decisions aren't just taken off the cuff but are thoroughly thought through, and therefore are more likely to provide a good service.

Your thoughts, folks?

 

[Mark T Jones]

The potential benefit is actually down to your personal attitude

If you embrace them as directors with the knowledge, fresh eyes and skills they can bring then they might well repay you by giving the business a new lease of life. Their reward will be in the difference they make

On the other hand (as often happens) if you take the view that it's Your business and theirs is just a title, they will reward you by acting as employees and not really caring

 

[mattk]

You example is proof that you can add numerous directors without it having any meaningful impact, positive or negative, to a company.

I don't see why have multiple directors would add any level of prestige to a company.

Having numerous directors doesn't automatically mean they are involved in the day to day decision making.

If this is your first company I would be keen to keep it simply. The own reason to have multiple directors in my opinion would be if they own a share in the company and you want this reflected in the company's structure.

 

[Clinton]

I'm surprised nobody has mentioned so far that there are two types of directorship. There's the job tile of director and there's the Company Director (ie. registered at Companies House as director).

The former can be given out to employees without giving them too much - it's just a title.

A Company Director, OTOH, has numerous legal responsibilities (and associated risks). If I were advising the employees I would advise them to not take on Company Directorships without getting additional compensation for the risk and to cover statutory responsibilities they are taking on. They'd be wise to also ask for cover under a Directors and Officers (liability) insurance.

 

[Clinton]

PS: Just a footnote to my previous post. Just giving out a title comes with its own risks (research shadow director, de facto director etc).

And if someone who has been disqualified as a director is appointed a director "in name only", that's an ouch. Potential problems.

Giving a third party the impression that one is a director when one is not ... is another danger area.

I keep banging on about people going and getting professional advice and it's getting boring to keep repeating myself but with almost everything in business there are potential pitfalls / legal complications / risks / dangers and while it's great to chat here in UKBF the only sensible course is to take proper legal advice before actually doing anything.

 

[CreatorChip]

The potential benefit is actually down to your personal attitude

If you embrace them as directors with the knowledge, fresh eyes and skills they can bring then they might well repay you by giving the business a new lease of life. Their reward will be in the difference they make

Thanks Mark – that's exactly the answer I've been looking for myself. I'm very keen that my new company is not just "Me, Ltd" – and the directors-in-waiting I've secured are all individuals with critical sector knowledge and/or skills that make them people I respect with opinions I want to shape our future trade.

And in response to @Clinton's comment, I've offered them D&OL insurance to be paid for by the company.

However, since my last post to this thread, I've been yet further confused by my research into exec and non-exec directors. I'm currently being advised by an ex-boss of mine (who's currently away on hols), whose mastery is sales, and who offered to be my "non-exec" – which he explained is an individual who advises the board but isn't on the board.

But then I go and find a website (Law Donut, "Responsibilities as a Director FAQs", Q18) where it points out that non-execs do share the same responsibilities and liabilities as any other director – they just aren't involved in the day-to-day running.

If the Law Donut site is right, I guess my directors-in-waiting are likely to be non-execs-in-waiting. But should I warn my old boss that calling himself my non-exec means he might be accepting more liability than he first thought when he began giving me set-up advice...?