Learn what a de facto director is, how it differs from a shadow director, and the risks associated with both.
A board of directors has a duty of care to its organization, and as such, can be held legally responsible for any breach of fiduciary duties. But what happens when someone outside vs. inside the board of directors calls the shots — for example, a de facto director?
This article explains the definition of a de facto director, risks associated with assigning a de facto director, tips to avoid de facto directorship, and how OnBoard board management software powers effective boards of directors.
What is a De Facto Director?
A de facto director assumes responsibility for acting as a company director despite never receiving an appointment or registering at Companies House. However, because they identify as directors and act officially, they are equally liable as de jure directors.
While a de facto director is sometimes referred to as a shadow director, there’s a slight difference. A shadow director acts behind the scenes, whereas a de facto director typically uses the title of director and acts publicly. Under the Companies Act, both de facto and shadow directors can be held liable for breaches of directors’ duties.
What are the Risks of Assigning a De Facto Director?
De facto directors are subject to similar legal duties, responsibilities, and liabilities of other de jure directors. Under the law, all company directors must uphold the duties and responsibilities under the Companies Act and common law maintained in the Companies House. They include the following:
- Acting in good faith in the best interests of the company
- Exercising care and diligence in their duties
- Avoiding conflicts between personal interests and those of the company
- Enforcing internal practices and structure of the company
- Ensuring the company complies with all statutory obligations
Upon breach of director’s duties, a court may find a director personally liable, subjecting them to criminal charges and other penalties. These include:
- If the court finds you guilty of a criminal offense, you face imprisonment of up to five years, punitive fines of $200,000, or both.
- If the court finds you contravened any civil penalty provision, you face penalties of up to $200,000.
- The court may find you are personally liable to compensate others or the company for any loss or damage suffered due to your actions.
- The court may disqualify you from managing any company in the future.
Tips to Avoid De Facto Directorship
Your company can avoid de facto directorship by following one or more of these tips outlined by the Institute of Directors:
- Keep non-de jure directors out of the corporate governance structure, such as away from decision-making processes on corporate policy and implementation.
- If non-directors are involved in these decision-making processes, ensure their role is clearly defined and not equal to official directors. They should also not exercise real influence.
- Ensure it’s clear that all non-directors act on instructions from full directors and that you constantly monitor and review their work. You can do this by assigning proper job descriptions, performance appraisals, regular reporting, and monitoring.
- Maintain tight financial control, for example, setting limits on their spending powers and not allowing non-directors to be sole signatories to company bank accounts or exercise control over company assets.
- Use formal management and supervisory structures, and formally appoint directors to run the company’s activities. Avoid including the word director in job titles of people who are not directors.
- Prevent non-directors from accessing confidential board information
OnBoard's Board Management Solution Powers Effective Boards of Directors
Whether your board includes de facto or independent directors, OnBoard provides a board portal solution to help everyone stay connected and productive. From preparation, through planning and follow-up, the platform addresses the unique needs of executive directors and administrators alike, with features like:
- Industry-leading security, compliance, and data protection that’s certified and accredited
- Agenda Builder and Minutes Builder for simplified meeting administration
- Secure messenger and Zoom integration to enhance communication
- Board assessments to empower boards to measure their performance against the organization’s goals
Ready to empower your board with the tools they need to succeed? Check out our Board Management Software Buyer’s Guide for information on selecting a board management vendor that will make your board happy and keep meetings focused on strategy.
About The Author
- Adam Wire is a Content Marketing Manager at OnBoard who joined the company in 2021. A Ball State University graduate, Adam worked in various content marketing roles at Angi, USA Football, and Adult & Child Health following a 12-year career in newspapers. His favorite part of the job is problem-solving and helping teammates achieve their goals. He lives in Indianapolis with his wife and two dogs. He’s an avid sports fan and foodie who also enjoys lawn and yard work and running.
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