February 9th, 2015 / Insight posted in The Sunday Times Business Doctor

Beware of having directors in title only

DY writes: I want to promote a staff member and put him in charge of day-to-day operations for my company. Can I also give him the title of director and do I need to formally appoint him as a company director?

The title of director is not reserved exclusively for formally appointed company directors and often gets used in large organisations such as banks, writes Jon Dawson, partner at Kingston Smith LLP. There are a number of points you need to consider.

Giving employees senior titles can be a good motivational tool. It can also enhance their reputation, both within the company and with your clients and suppliers.

If you were to formally appoint employees as directors, they would have statutory duties to comply with. If they failed to carry these out, they could be prosecuted under the Company Directors Disqualification Act 1986.

At a practical level, a director can engage in contracts on behalf of the company and is responsible for things such as making sure accounts are filed on time. He or she will also be named as director on the public record at Companies House and can approve official documents, such as statutory filings, annual accounts and company tax returns. You would need to ensure that both of you are happy with this level of authority.

If, instead, you gave the title of director without a formal appointment, the courts could still decide that the employee was a shadow or de facto director and hold him liable for any contracts he entered into on behalf of the company.

An alternative approach would be to give him a senior title that doesn’t include the word director. Common examples include head of operations or chief operating officer. These still carry prestige and meet your main objective, while avoiding ambiguity about the employee’s right to enter into agreements on behalf of the company.