Types of Directors
When you are making a decision to incorporate a private limited liability company in Singapore, it is of extreme importance to understand the structure of your corporate firm.
To start with, you should note that it is legal requirement that companies incorporated in Singapore must have a minimum of 1 director who is ordinarily resident in Singapore.
Therefore, as a business owner of a Singapore-incorporated company, you have to be acquainted with the requirements and process of appointing the various types of directors.
For an individual to be eligible for an appointment as a director, he/she must be:
- A natural person (i.e. a company cannot be appointed as a director);
- ordinarily resident in Singapore;
- of a minimum age of 18 years old; and
- having a full legal capacity (of sound mind, meaning the person lacks capacity if he is unable to make a decision because his mind or brain is impaired.)
With the above introduction, this guide delves into the types of directors explains that a Singapore company is legally permitted to appoint.
An executive director is an individual who serves as both a director and a full-time staff of the organization, and receives a salary or is on the company’s payroll.
In most organizations, the constitution gives the Board the authority to appoint one or two managing directors among themselves. As mentioned above, the duties of a managing director and a CEO may overlap. The managing director, or CEO, is heads day-to-day operations within the organization.
Generally, the directors delegated a majority of their roles and authority regarding the firm`s activities to the managing director or the CEO. The selection of the managing executives takes place through a formal agreement and a unanimous decision by the Board. In most cases, managing directors are not subjected to the retirement or rotation regulation in the memorandum of association to which other executives are subject.
Moreover, in most companies, the constitution frequently allows the Boards to give the managing director all the authority exercisable by the Board subject to any terms and limitations that fit the scenario.
Other Executive Directors
Apart from the managing director, companies may have other executive directors who are salaried employees. For example, some companies may have a chief financial officer or chief operations officer who may also be appointed a company director.
Such a person is a part of the executive administration of the organization. He/she may have an additional portfolio or specific responsibility or responsibilities for the financial operations or general operations of the company (as the case may be), and also part of the Board.
Non-executive directors comprise of directors that are nominated by the Board of the entity and they do not engage in day-to-day administration of the organization. They are part of the staff and do not receive salaries.
Instead, they receive directors’ fees by way of remuneration subject to such fees being approved at general meetings of the organization as stipulated in various sections of the Companies Act. Aside from daily administrative duties in the firm, non-executive directors have the same duties and obligations as the other directors and are appointed to sit on Board committees. Non-executive directors can be independent directors or nominee directors.
The term non-executive directors are usually interchangeably with the concept of independent directors although not all non-executive directors are considered independent. Usually, independent directors are nominated by the Board of listed organizations instead of unlisted companies.
Listed companies that are registered in Singapore Exchange limited (SGX) must adhere to the doctrines of the Code of Corporate Governance provided by the Monetary Authority of Singapore (MAS) and the regulations stipulated in the Listing Manual of the Singapore Exchange Securities Trading Limited.
The Code stipulates the following as excellent examples of scenarios where a director would not be seen as independent:
- Executives who are hired by the organization or any of its associated firm at present or in the past three financial years;
- Any director, whose close family member is or has been hired by the organization or any of its associated firms in the past three financial years as a top executive, and whose salary is determined by the Board or salary committee;
- Any director who (or close family members who) is a significant shareholder, or a partner, or executive director of any business venture to which the organization is established, or from which the firm receives, considerable remuneration in the current or previous financial year. According to provisions in the constitutions of many companies, remunerations accrued over any financial year exceeding $200,000 should be regarded as substantial;
- Any director or a close family members with a 10% stake in the company`s shares;
- Any director who is or has been mandated, whether through formal or informal authority, to behave based on the directives or instructions of 10% of the shareholder regarding corporate matters in the current or previous financial period.
Therefore, a director who does not fit in any of the above category is usually deemed independent. Where a company wishes to regard a director who falls within any of the above categories as independent, the company would have to make full disclosure on the dynamic of the director’s association with the business and explain in detail its reasons for regarding the director as being independent.
Furthermore, the Code mandates independent directors to comprise of at least one-third of the executive Board.
Moreover, the Code provides that half of the Board must be independent directors where;
- The Chairman and the CEO is the same individual;
- The chairman and the CEO are close relatives;
- The chairman is also part of the administration; or
- The Chairman is not an independent executive. The extra obligations will apply to a listed organization with authority from the Annual General Meeting (AGM) after the end of the financial periods starting on or after May 1, 2016.
Although adhering with the Code is not an obligation, registered organizations must reveal their corporate governance activities and provide rationale for the any nonconformity from the Code in their yearly reports. Companies deviating from compliance with the Code are often subject to scrutiny by regulators, its stakeholders and interested third parties.
A nominee director is an individual who is selected by the Board of a specific group or individual to represent such group’s or person’s interests. For example, the company’s employees, a particular group of shareholders, creditors, a major shareholder or debenture holder may be given a right to appoint a nominee director.
Non-executive directors are often nominated by shareholders. It is common to find non-executive nominee directors representing major shareholders in listed companies.
The authority of the group or individual to embark on such an election is sometimes provided either in the firm’s constitution or under an agreement such as a shareholders’ contract. For example, a shareholders’ agreement or a joint venture agreement between parties may also entitle each party to nominate 1 or more director(s) each or nominate 1 joint director. An employee of a company who is asked to sit on the Board of one of the company’s wholly-owned subsidiaries is also referred to as a nominee director.
An appointed director has to discharge his/her duties and responsibilities personally at all times while in office. In situations where he/she is unable to act in the case of illness and/or other commitments, or where he/she may be absent from board meetings or is unable to attend to the company’s business for whatever reason(s), a director may appoint another person to act on his/ her behalf.
The director so appointed is known as an alternate director although he/she may sometimes also be referred to as a substitute director.
A company’s constitution may stipulate that a director can select a substitute director to employment all of their authority for a definite period subject to the other executives’ approval. The appointment of an alternate director does not increase the number of directors, although he/she is regarded as a “director” according to the provisions of the Companies Act and thus is obliged to undertake the duties of a director.
In addition, the alternate director must leave the position if the appointing director leaves the position as a director or get rids of the alternate director from his/her position.
De facto Director
According to Section 4 of the Companies Act, a director is an individual who occupies the position of director of a company, regardless of the title. This implies that an individual who is serving as the director of the firm and conducts the duties of the position but who is not officially named as a director and was not formally selected as the director may be regarded as the director of the organization.
This can happen because the individual not the official director but undertakes the functions of a director, for example, attend and participate at Board meetings regularly and sets the strategic objectives of the company as if he/she were a properly appointed director.
Hence, such an individual is referee to as a “de facto director”. A de facto director`s mandate falls under the normal functions and responsibilities of a director. Therefore, it is essential to determine an individual is a de facto director.
When gauging if an individual is a de facto director, the court will assess whether the individual undertakes the duties and responsibilities of a director or if the business entity has officially made the individual a director. In other words, the primary question is whether the individual has undertaken any of the duties that only a director can undertake.
Other examples of de facto directors include a consultant to the company who undertakes tasks usually reserved for a director and an individual the shareholders have acted to choose as a director but where the nomination was not followed through (where there was no consensus at the annual general meeting).
According to the Companies Act, Section 4, a director entails an individual whose guidelines or directives of the director or a majority of the executive of a company are used to act.
Here, such an individual is typically referred to as a “shadow director”. The difference between a shadow director and a de facto executive is that de facto executives are individuals who act as directors while shadow directors are people who have the authority to instruct directors on how to act.
For an individual to be considered a shadow director, it is essential to illustrate that the corporation`s directors or most of the entity`s directors are used to act based on his/her instructions.
It is insufficient to prove that an individual is a shadow director when they are the only director serving as stipulated by their instructions. Here, the primary question emanating from the facts is whether an individual is a shadow director. Similar to the scenes of a de facto director, a shadow director falls under the normal functions and responsibilities of a director. However, although an organization does not have the power to select a director for another firm, it is possible for a firm to be considered as a shadow director of another corporation.
If you need guidance on matters concerning the types of directors in Singapore, contact our experts at Tianlong Services today and we will offer expert guidance to ensure your company remains in compliance with Singapore law as it grows and expands. Contact us today for a free consultation.