Knowledge Centre

1.1 By law, every private limited company must have at least one company director who is a natural person - as opposed to another company.

Company directors as classified by law (not necessarily employees that have the term director in their job title; sales director, for example) are responsible for ensuring the business complies with company law and can be found personally liable for the firm's failings.

People who are legally recognised as directors of the company should sit on your board, but that doesn't mean other employees can't attend. To achieve the right balance it might sometimes be necessary to include employees who are not classed as directors to link up relevant parts of the board meeting.

The company secretary acts as the chief administrative officer for the company.

1.2 Decide who will be legally recognised as a company director.

Directors must ensure by law that:

A public limited company must have at least two directors.

• key information is sent to Companies House
• the company produces accounts
• the board of directors approves the annual accounts
• minutes are taken as a record of board meetings
• the company complies with employment and health and safety law
• the business pays the correct amount of tax, VAT and National Insurance on time.
• they avoid conflicts of interest, declare any conflicts of interest and do not accept benefits from third parties

1.3 Decide if you want to appoint a company secretary.

It is no longer obligatory to appoint a company secretary, although you may still choose to do so.

The company secretary is usually appointed by the company director. As with company directors, a company secretary has responsibilities under company law and can be prosecuted if they fail in their duties.

The roles of company director and company secretary can now be held by the same person.

1.4 Aim to create a fair representation of your firm's interests.

Make sure the spread of board members represent all areas of the business. It is very important to include someone with a close understanding and knowledge of the financial aspects of the company.

Try to assemble a variety of personalities. If everyone has the same viewpoint and agrees with one another then the company may not progress.

1.5 Check each director is legally allowed to sit on your board.

Previously disqualified directors are not allowed to hold the position again unless a court grants permission.

Directors over the age of 70 in public limited companies must have their appointment approved at a company general meeting.

All directors must be at least 16 years of age.

1.6 Assess the number of people you want on your board.

More than seven board members could prove unwieldy and make decision-making difficult.

Remember that you might also decide to appoint non-executive directors (see 2).

1.7 Decide on your governance structure.

The most usual board structure in the UK is a unitary board, in which all members attend board meetings at the same time.

Some businesses have a tiered board structure consisting of an operational board and a supervisory board, where one reports to the other, but the same chairperson sits on both.

2.1 Decide whether your board could benefit from using non-executive directors.

Non-executive directors are not involved in the day-to-day running of the business, but can bring many business benefits, possibly as a chairman. For example, specialist knowledge, industry contacts or money to invest.

You can use non-executive directors' experience and objectivity to help make difficult decisions. For example, setting directors' pay levels or deciding if your firm should undertake legal proceedings.

Although not usually classed as company employees (see 3.3), non-executive directors are exposed to the same risks as other directors and should be remunerated as such (see 4.3).

2.2 Check where your business could benefit from particular knowledge or contacts.

Define what you want your company to achieve in the future in terms of strategy and growth. Refer to your business plan for guidance.

2.3 Identify where the skills and knowledge gaps are.

Assess the members of the board from your company. Decide what skills and knowledge they lack and whether it would be valuable to find non-executives who could fill such gaps.

If you are developing an innovative process but lack know-how about protecting your intellectual property (IP), an IP lawyer could be an invaluable addition. Alternatively, if you are looking to raise investment, appointing an accountant as a non-executive director could provide investors with evidence of financial rigour.

3.1 Identify the skills you need on your board.

Think carefully about how you will fill positions on your management team also if these will also lead to a place on your board. Consider which skills you want in-house and which you might fill through non-executive directors.

Find people who can help you achieve the goals you have set out in your business plan.

It is good to have a mix of personalities and approaches on your board to generate diverse ideas and solutions. Try to ensure that any conflicts between your directors create a healthy tension rather than cause problems.

Be wary of creating a management team of people who are too similar. You may all dislike - and neglect - the same aspects of the business.

Aim to build a board that has the contacts and knowledge you need. For example, if you want to raise venture capital you might look for someone who has found investors previously or who has a network of relevant contacts.

Ensure your board looks credible to outsiders. This will make potential investors, future management candidates and business partners take your business more seriously.

A board should contain individuals with hands-on business experience who can look at your company's problems and goals strategically.

Look for people who are honest and trustworthy and who can help in a mentoring capacity where necessary.

3.2 Look for suitable board members.

Ask all your business advisers, such as your accountant and solicitor, whether they know of potential candidates.

Contact relevant trade associations as well as Business Link and business angels' associations to see if they can recommend suitable candidates

Attend business seminars, conferences and exhibitions that offer opportunities to network with director-level candidates.

Consider using a professional recruitment company.

Advertise in relevant business or trade media that might attract the type of candidate you are looking for.

3.3 Take professional advice regarding the employment of a non-executive director.

Before taking on non-executives, take detailed financial advice about their terms of employment and taxation liabilities. You should arrange a contract of employment and/or a consultancy agreement with them prior to their involvement. To reduce the possibility of tax liabilities for your business, you need to clarify whether the non-executive director will be seen as employed, self-employed or both by HM Revenue & Customs. If they are seen as self-employed, you won't have to pay PAYE or National Insurance contributions for them, but they may expect higher pay owing to the lack of job security. For further advice on the tax implications for your business of employing a non-executive director, speak to your accountant.

3.4 Invest time in the recruitment process.

Compile a shortlist of potential candidates.

Meet up with those on your shortlist more than once.

Be prepared to sell the benefits of becoming a director or non-executive director for your company and to answer questions they might have.

Assess each person's skills and experience and explore their motives for wanting a position on your board.

Check the person has good references.

3.5 When recruiting non-executives be wary of certain individuals.

People who act as so-called 'professional directors' and make all of their income from sitting on various boards may not have enough time to dedicate to your needs.

4.1 Brief new board members properly.

Prior to new members of your management team starting work or a non-executive joining your board, give them all the information they need such as:

• notes of previous board meetings
• an up-to-date copy of your business plan
• biographies of existing board members.

4.2 Review board members' roles regularly.

Take time to assess whether the company and individual board members are getting what they want out of the relationship.

Use this information to decide whether you need to make any adjustments to your board.

Reviews are often carried out by the chairman or a non-executive. Board members could also take it in turns to appraise one another.

4.3 Offer a good remuneration package.

Employees who sit on your board may expect some extra benefits for the additional legal responsibilities they take on.

There are no set payment rates for non-executive directors. Some may initially offer their services for free if they feel the company will become a success. Other non-executive directors may charge you. For example, an investor in your firm may request a place on the board in return for their capital and then charge you a fee.

Even though non-executives are not involved in the day-to-day running of the business, they still carry the same legal responsibilities as other directors.

4.4 Consider offering shares in the company instead of fees or additional salary.

If you want to appoint someone as a non-executive director but cannot afford to pay them, you could consider offering them shares in the business instead.

Review the package being offered to your directors and non-executives on a yearly basis.

4.5 Make sure you know your position on dismissing directors.

Dismissing a person from their office as a director needs careful consideration. However, a company director may also work as an employee of the company, so if you also dismiss them as an employee, they will have the same legal protection against unfair dismissal as other employees.

If you are unsure of your position, seek legal advice before taking action.

5.1 Choose a suitable chairperson.

It is a good idea to have a chairperson, but this is not a legal necessity. It can be useful to have someone running board meetings, making sure everyone has their say and that all points of view are considered.

In a smaller company, the chairperson and the managing director will often be the same individual. However, where possible, someone should be appointed to each role to provide diverse viewpoints.

The chairperson is responsible for setting the agenda, running the meeting and summarising what has been decided.

5.2 Decide how often you are going to hold board meetings.

While your company is growing quickly, you might want to hold monthly board meetings to keep the direction of the business on course.

If you have external shareholders, they may want to sit on your board and they may require frequent meetings.

Small companies are no longer obliged to hold an annual general meeting (AGM), although they must hold one and give adequate notice for one if any director or at least 5% of shareholders request it.

5.3 Set the agenda.

The chairperson will normally set the schedule for board meetings.

A typical board meeting will:

• approve the minutes of the last meeting
• look at matters not due to be covered by the agenda
• look at procedural and compliance issues
• review the business' financial performance
• look at foreseeable threats and opportunities
• take decisions on strategic issues, such as buying another company or bringing in new shareholders

5.4 Choose a suitable location.

Look at holding some board meetings away from your workplace. This can help to give people a fresh perspective.

5.5 Ensure everyone has the opportunity to prepare.

Send your board members the monthly management accounts even when there is no scheduled meeting.