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  • Understanding the Key Differences Between the Role of a Shareholder and Director
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17
Jun
Understanding the Key Differences Between the Role of a Shareholder and Director
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While many businesses are wholly owned by their company founders, others have a diverse ownership structure comprising multiple shareholders who possess a financial stake in the company’s future.

Does being a shareholder grant them any authority over the company’s daily operations? To answer this, we need to first understand the distinctly different roles of shareholders and directors within a company.

Shareholders and directors

Shareholders own the company by buying and holding its shares, acting as the company's financial supporters. Directors are responsible for day-to-day management of the business and its operations. Being a shareholder does not automatically confer the right to have a say in how that company is run on a day-to-day basis.

Unless specified in the articles of association, a director is not required to be a shareholder, and a shareholder has no automatic right to be a director. Although there’s no automatic right, there is nothing preventing directors from also being shareholders. As company founders tend to become directors and may have begun as the only or the majority shareholder, this is not uncommon, especially in small and medium-sized companies.

This dual role often blurs the distinction between shareholders and directors, particularly in family-owned businesses or where founders continue to be actively involved after retirement.

Shareholders may therefore have a lot of influence over directors or act as de-facto directors, even if they retire but continue to take an active role in the company’s affairs. In this instance they must tread carefully, as they may still be legally considered directors in the event something in the company is mismanaged.

What responsibilities do directors have?

The title ‘director’ is given to senior management staff in a business. Usually, the Chief Executive Officer (CEO), Chief Financial Officer (CFO), and Chief Operating Officer (COO), report to the Board of Directors. Directors are legally responsible for the company’s management. Directors' duties include ensuring timely and accurate information submission to Companies House, striving for the company’s success, and acting in its best interests. Failure to meet these responsibilities can lead to investigation and disqualification.

What rights do shareholders have?

Depending on the size and nature of a company, a shareholders’ access to company information and involvement in daily operations may be limited. They do not always have access to most company records, which are managed by directors. Beyond receiving annual accounts, additional information is available only if voluntarily provided by directors. Nevertheless, shareholders have specific rights and duties outlined in the Companies Act 2006, the company’s Articles of Association, and any shareholders' agreements.

What company decisions do shareholders have a say in?

While directors are more involved with the daily business operations, depending on the voting rights attached to their shares, shareholders can hold significant sway over major company decisions at shareholders' meetings.

Major shareholders possess considerable voting power, which can sometimes result in a controlling interest, where one individual can outvote all others. Generally, shareholders have the right to vote on key decisions such as:

  • Appointing or removing directors (majority shareholders can appoint or remove directors at any time);
  • Amending the company’s articles of association;
  • Changing the company name;
  • Approving long-term service contracts for directors; and
  • Authorising large transactions, such as the acquisition of another company.

While major shareholders have substantial influence, minority shareholders typically have less sway over the company’s direction. However, it is broadly accepted in the business world that granting shareholders excessive power over daily operations can hinder directors and disrupt the business's functioning.

Can shareholders tell directors what to do?

While shareholders have significant influence through their voting rights as well as the ability to approve major decisions, they do not have the authority to directly instruct directors on how to manage the company on a day-to-day basis. The directors have the autonomy to manage the company's affairs within the framework set by the shareholders and the company's articles of association.

For further advice on this and other Corporate & Commercial issues, please contact Chris Brightling, Caroline Armitage, Jonathan Masucci, Elesha Bradford or Sarah Karam.

Corporate, Banking & Finance Commercial Law

Before relying on this commentary please read the Reliance on information posted section in our Terms of Website Use in our Legal section. Please note that specialist advice should be taken in relation to any specific queries and the information above is provided for general information purposes only.

Authors

Jessie Cloughley

Trainee Solicitor
Corporate, Banking & Finance; Commercial Law

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