In the early days when you start a company, what does it mean to appoint yourself as a director? How serious is the title?
I have below the official Institute of Directors guidelines (UK please refer to your own country for those guidelines):
It is important when you become a director to take the time to familiarise yourself with the serious side of forming a company.
Make a brew and set a side some time to read the above:)
Can you really get struck off?
Yes, behave in an unethical or careless way and you might just see yourself struck off and banned from being a director. This will depend on your country of formation (where you registered your company), but the penalties can be serious, including prison terms.
Therefore, anything you can do to demonstrate you acted with due care will aid those difficult conversation in the unfortunate event your company comes under any questions. You cannot plan for everything, but you can show you did the best you could, with the information you had.
So how do you demonstrate your are acting in the best interests of the business?
Minutes. As a record of a business decision, minutes can be invaluable. How many times have you had a major verbal discussion about the business but have a disagreement with someone? In 3-6 months time did they hear that conversation differently? While discussion over email can be evidence, verbal conversations can't, it is heresay (unless you record* them).
Therefore, written Minutes of formal decisions are helpful for the day to day running of the business as well as dealing with authorities such as Auditors and Company House. Even an email exchange, as long as you document/file them as Minutes, can work. E.g. ask the receiver to confrim they agree with the content.
Complicated to do Minutes?
Absolutely not. In the times before computers, companies simple had a book and the company secretary recorded Minutes from meetings. You can therefore have a book, a cardboard folder of notes signed off or set up a file on your lap top. Even emails can work as an audit trail of decisions as long as you save and title appropriately.
What do you do:
1. Even if it is just you. Set up a quarterly board meeting in your diary.
2. Appoint a board. You might not be a large company but having an external person as a mentor/guide in the early days to help you and your co-founders navigate corporate government, is useful. Make sure they have at least 5 years experience on a board.
3. Nominate a Chair and a Company Secretary. You can be both.
4. Make sure the Minutes have, the time, date and place of the meeting. Who attended and who did not. Also, note if the participants were on the phone, videocall or in person.
5. You can use virtual PA's to record meetings.
6. You can of course record an audio of the meeting, just make sure all attending consent and are aware they are being recorded.
7. Have an agenda and note decisions or actions that people have to take away.
8. Minutes can be in bullet points and paraphrase the discussions.
9. Make sure after the meeting you circulate the Minutes to those who attended and get them to approve. The easiest way is to say 'If you do not respond in 5 business days, it is assumed you agree to the Minutes'. If people are on holidays make sure you take this into account with deadlines.
What should you be covering?
Avoid trivial things like deciding on the paint colour of an office or a change in biscuit brand for the break room:).
What you need your Minutes to do, is to capture major decisions and you and the board acting in the best interest of the company. For example, if you get a report of a fault to a product- how are you going to address? What research and corrections will you make? Did you get an independent review and found out it was actually user error. How will you communicate this and educate customers in the future?
Another common example is the non-payment of invoices. How will you manage the business cash flow to ensure the company is liquid, do your fellow board members agree to taking out an overdraft? Or proceed with legal action against the customer? Showing no action on debt can be seen as irresponsible. An important line from the IOD guidelines:
'A company director can be held personally liable for losses incurred by a business which are proven to be the result of board decisions, or a failure act properly'.
Should you just avoid being a director?
Ask yourself - are you happy with responsibility? If the answer is no, maybe have a good think about teaming up with people when forming a company. There is nothing wrong being a shareholder and not taking a director title. It is very common. Those that enjoy rules and structure will be in their element as directors.
A key thing to walk away from this piece with regards to being a director is, be sensible. You alone can't know everything, but faced with an issue how do you handle it?
1. Make sure you record issues - it can be a formal quarterly board meeting, or if more urgent, simply arrange a conversation on the topic and note what was discussed and sent yourself an email or save as a Word doc to a file.
2. State how you will address these issues - do you need to do some research? contact a specialist? contact trade bodies or pick up the phone to a government agency?
It could be your local equivalent to the citizen advise bureau or local enterprise office. There are plenty of online resources you can search. Not all valid, but demonstrates you made an effort to resolve the matter.
3. Be honest, if you do not have a solution to the problem, e.g. your cash flow has dried up due to non payment by a large customer. (You could argue you should not rely on one customers, but for some industries this is hard to avoid). This is when you may have to look at liquidation.
As long as you have Minuted the remedies you tried (discount on the invoice, tried to sell on the debt to a factoring company, engaged a debt collector etc), you have demonstrated by recording these actions, you acted in the best interest of the business.
This is meant as an introductory piece to make you aware of the power of Minutes and the seriousness the role of a director has. There are plenty of business books and free online resource with templates for Minutes and further information to learn more.
Crucially, when you become a director, you have to evidence the strategies and decisions for your business.
Your Minutes are an often forgotten tool, in the unfortunate event you do find you have to wind up your business. Minutes are a major document requested by Lawyers and Liquidators. So make sure to maintain Minutes in any form as early as possible as part of your tasks for running the business.
*Any form of digital or analogue recording