Understanding a company board can get confusing, due to the existence of so many categories of board directors. But, if you’re an aspiring business owner/professional, before diving in, you need to have full clarity on the board structure, especially for selecting the appropriate position in which you want to function. This blog explains the different types of company directors and their job roles in managing the company. Leverage it to identify which position aligns with your strength. It will further give you a brief idea of their roles and responsibilities, by which you will be able to understand a company’s flow of work, enabling you to effectively collaborate with your colleagues (i.e., the other Board of Directors).
Table of Contents
Understanding Different Types of Company Directors
What is a Board of Directors?
The governing body of a corporation is its board of directors (BoD), whose members are chosen by shareholders (if the company is public). The BoD’s duties include setting the firm’s strategy, supervising the management team, and defending the interests of stakeholders and shareholders. Especially, every public company must have a Board of Directors mandatorily. Even the private companies also have a board, but it is not mandatory for them. The various types of company directors that exist within the board will further be discussed as the blog progresses.
How many Directors can a Company have?
Different company structures have different sets of rules in this regard. The maximum and the minimum limit of directors a company can have has been displayed hereunder:
Company Type | Minimum No. of Directors | Maximum No. of Directors |
Private Limited Company | 2 | 15 |
Public Company | 3 | 15 |
One Person Company | 1 | 1 |
Nidhi Company | 3 | 15 |
Section 8 Company | 2 | 15 |
*** Company structures like an LLP, sole proprietorship, or a partnership, do not require Directors. They possess partners/members, who perform the duties of the Directors.
1.Alternate Director
Who are they?
The Companies Act, 2013 recognizes various types of company directors, including alternate directors. An alternate director is a director, who is usually appointed on occasions when the head director of a company has been away from India, for more than 3 months. Moreover, the other directors can also appoint an alternate director on mere speculations regarding the absence of the real director, as per the Companies Act, 2013.
Roles and Responsibilities
- The alternate director must stay updated at all times regarding the company’s functionality and dealings, as they might need to step up at any moment in the place of the original director.
- The alternate director can only function and make decisions in the absence of the original director.
- The alternate directors are supposed to attend meetings and vote in the place of the original director.
- The alternate director must possess the capability of performing all the duties of the original director and must perform the same, whenever required.
- The alternate director is equally liable for his actions and mistakes, just like the original director.
2. Shadow Director
Who are they?
While the Companies Act, 2013 outlines various types of company directors with clearly defined roles and responsibilities, there’s one eccentric category- the shadow director. A shadow director is never officially appointed or listed as a director but carries out all the roles and responsibilities of a director. However, shadow directors are popularly recognized by law, and hence are bound by all the obligations of an original director. The shadow director functions as an alternate for any standard director.
Roles and Responsibilities
- The shadow director is responsible for demonstrating diligence and care, which includes dispute resolution and mediation.
- The shadow director must avoid any conflicts of interest, refuse third-party benefits, and be transparent about every organizational transaction.
- Before taking up the spot, the shadow director must disclose any personal interest, if there is any.
- The shadow director must not act beyond the circumference of the vested powers.
- The shadow director must however practice independent judgment while making any decision regarding the company.
3. Residential Director
Who are they?
In India, all the company types require a residential director. A residential director is a director who has stayed in India for over 182 days within the scope of the previous financial year, during the time of his/her appointment. Without a residential director, the MCA does not accept the company registration process. The residential director can be identified as one of the most predominant types of company directors, as explained under the law of the land.
Roles and Responsibilities
- A residential director performs all the roles and responsibilities of a mainstream director.
- The residential director is usually required by a company to perform or fulfill the statutory requirements of India.
- The residential director, in many cases, is free from the responsibility of operational control.
- The residential director is responsible for attending the board meetings mandatorily (i.e., at least one per year), especially for going through the statutory formalities.
- Whenever any legal need arises, the residential director must act on behalf of the company.
4. Professional Director
Who are they?
In the MNCs and large corporations, professional directors are often appointed to the Board of Directors, so that the corporation can leverage their expertise to facilitate seamless company management, be it operations or HRM. Professional directors hold relevant professional qualifications in management, but unlike some other types of company directors, they do not have any personal financial ties (pecuniary interest) to the company. They are valuable due to their professional skills.
Roles and Responsibilities
- The professional director is responsible for giving sound professional advice to the company regarding management.
- The professional director is further responsible for strategizing, reviewing, and overseeing the operations of the company.
- The position of professional directorship signifies full-time employment in itself.
- Segments like risk management and corporate governance are also supervised by professional directors.
- The professional directors are responsible for bringing in diverse perspectives within the organizations, by filling in the necessary gaps.
5. Independent Director
Who are they?
An independent director is also known as a non-executive director. These directors are responsible for improving the governance standards and corporate credibility. However, there are certain criteria that need to be fulfilled in this regard. The independent director must not be a nominee director, a managing director, or a whole-time director. The Companies Act, 2013 recognizes independent directors within the category of different types of company directors.
Roles and Responsibilities
- The independent director must have impartial judgment and give strategic advice to the company.
- The independent directors are supposed to protect and look over the interests of all the associated stakeholders.
- They are responsible for maintaining the overall transparency of the members and mediating dispute resolution.
- The independent director is further responsible for monitoring, scrutinizing, and reporting the performance of the management, regarding the agreed-upon goals and objectives of the board meetings.
- The independent directors are also responsible for deciding on appropriate compensation scales for senior management, executive directors, and important managerial staff.
6. Executive Director
Who are they?
The executive director, also designated as the Chief Executive Officer (CEO), is considered the senior-most employee of an organization. In simple terms, the CEO is the head of the Board of Directors. Generally speaking, the CEO manages and finalizes all the business operations, ultimately steering the company’s direction. So, the CEO or the executive director can be considered the most dominant category amongst this list of different types of company directors.
Roles and Responsibilities
- The CEOs are responsible for making the most important company decisions, which involve decisions regarding business expansion, joint ventures, mergers and acquisitions, and so on.
- The CEOs are hugely responsible for managing and supervising the activities of the other directors.
- Management of the cash flow and associated financial decisions also fall under the category of the CEO’s roles and responsibilities.
- The development and subsequent ratification of the company policies, rules, and regulations are facilitated by the approval of the CEO.
- Public representation of the company is also a primary duty of the CEO.
7. Small Shareholder Director
Who are they?
As the name suggests, the small shareholder directors (or SSD), represent the small shareholders of a company, or rather their interests. For this reason, these directors are also elected by the small shareholders only (as their key representatives). The SSD ensures that the company does not take any decision that is against the interest of the small shareholders. Amongst all the various types of company directors, SSDs function uniquely.
Roles and Responsibilities
- SSDs protect the interest of the small shareholders of the company and subsequently represent them.
- The SSDs further ensure that the small shareholders receive timely financial reports and associated important information about the company.
- The SSDs are also responsible for overseeing whether the company is running a profitable business or not.
- The SSDs are eligible to provide valuable insights and suggestions to the company for improvement.
- Having an SSD is mandatory for a publicly listed company, having a mediumly large bandwidth and the potential to draw on small shareholders.
8. Additional Director
Who are they?
Although as per the Companies Act, 2013, an alternate director and an additional director fall under different categories (as of the list of the different types of company directors), they somewhat function similarly. An additional director also fulfills the function of an original director and gets appointed temporarily. However, they are appointed to fill a gap, which may extend to some special expertise, sudden removal of a director or to promote diversity.
Roles and Responsibilities
- An additional director is responsible for providing his/her expertise (to fill a certain gap) for completing a project or business strategy.
- An additional director is further responsible for taking up the spot of a director, who has either resigned or has passed away.
- An additional director is also responsible for (if required) promoting diversity within the company, and representing the same.
- The additional director is hugely responsible for providing unbiased perspectives or insights on the non-executive matters of the company.
- The additional director is further responsible for overseeing the regular business operations, just like an original director would do.
9. Women Director
Who are they?
The Companies Act, of 2013, enacts that there should be at least one women director within the list of ‘types of company directors’ that frame up a board. It is mandatory for a publicly listed company, especially when the company has a paid-up capital of over ₹100 crore. Women directors, as the name suggests, represent the women stakeholders of a company. Amongst the various types of company directors, a women director majorly focuses on corporate governance.
Roles and Responsibilities
- A woman director functions similarly to that of an original director, fulfilling all the obligations associated with the company norms.
- A woman director can further act up as a nominee director (usually elected/nominated to protect the interest of a specific group of people).
- A woman director can also act as an independent director (who is usually not liable to ‘retire by rotation’).
- A woman director, while acting as a nominee director, can represent the women stakeholders of the company.
- Women directors are responsible for improving corporate credibility and governance standards.
10. De Facto Director
Who are they?
Just like the shadow director, the de facto director also does not enjoy a formal position. However, the shadow director enjoys a more powerful position, wherein they can even command the other appointed directors. However, the de facto director acts as company director but is never appointed formally. The Indian precedents identify the de facto directors amongst the different types of company directors.
Roles and Responsibilities
- De facto directors are responsible for making important company decisions, especially strategic ones.
- They are highly responsible for avoiding any conflict of interest, as they are not appointed legally.
- They are further responsible for practicing reasonable duty of care and must act in good faith towards the company.
- They are also responsible for maintaining the confidentiality of the company information, again because they are not officially appointed.
- The de facto directors are majorly responsible for preventing the companies from getting traded, during cases of insolvency.
11. Rotational Director
Who are they?
A rotational director is identified by the Companies Act, 2013, as a director who retires at every annual general meeting of the company. In other words, these directors are appointed on a rotational basis. Amongst all the various types of company directors, only the rotational directors possess a predetermined tenure. A lot of other types of company directors (e.g., the managing director) fall under the category of rotational directors.
Roles and Responsibilities
- The rotational directors are mainly responsible for bringing in fresh and new perspectives to the company.
- The phenomenon of rotational directorship, in itself, encourages and promotes new leadership.
- The rotational directors are further responsible for facilitating a solid foundation of corporate governance during their tenure.
- The rotational directors are also responsible for setting up rules and regulations and company policies, in alignment with the company’s strategic direction.
- The rotational directors promote democratic leadership and break the pattern of autonomous leadership, as popularly accepted by modern workplaces.
12 . Managing Director
Who are they?
A managing director can be considered to have the maximum number of responsibilities, just after the CEO. If the CEO is considered to be the titular head, then the managing director can be considered the real head. However, in authority, the managing director is positioned lower than the CEO. Simply speaking, the managing director is responsible for overseeing the entire company and its operation as a head.
Roles and Responsibilities
- Considering all the different types of company directors, the managing directors are burdened with the most responsibilities.
- The managing director oversees the day-to-day business operations of a company.
- The managing director is responsible for strategizing the business growth plan of the company.
- The managing director acts as the team lead of all the inter-departmental company teams and provides goals and deliverables to each team.
- The managing directors are further responsible for formulating financial strategies for the company to drive profit and revenue.
The Essence of Directorship in India: The Key Takeaways
Having a solid grasp of these different categories of director responsibilities is essential for success, regardless of your career goals—be it CEO, a female director representing stakeholders, or an independent director offering unbiased monitoring. With this information at your disposal, you may successfully negotiate the dynamics of the boardroom and make a significant contribution to the expansion of the company. Now, go ahead and choose your point of potential amongst these different types of company directors. Follow Actax India,a for more such informative blogs.
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