6 In relation to company law distinguish between:
(a) executive directors; (4 marks)
(b) non-executive directors; (3 marks)
(c) shadow directors. (3 marks)
(10 marks)

6 This question raises issues relating to the important topic of corporate governance. It requires a consideration of the role of directors
with an explanation of the distinction between executive or non-executive directors and shadow directors.
(a) Executive directors usually work on a full-time basis for the company and may be employees of the company with specific
contracts of employment. Section 227 of the Companies Act 2006 defines a director’s service contract as a contract under
which a director of the company undertakes personally to perform services (as director or otherwise) for the company. Section
228 requires a copy of every director’s service contract to be kept available for inspection and under s.229 company members
have the right to inspect and request a copy of such contracts.
Additionally s.188 of the Companies Act 2006, relating to directors’ long-term service contracts, requires that no such
contract may be longer than two years, unless it has been approved by resolution of the members of the company.
In fact the Combined Code on Corporate Governance recommends that the maximum period for directors’ employment
contracts should be one year.
(b) Non-executive directors do not usually have a full-time relationship with the company; they are not employees and only
receive directors’ fees. The role of the non-executive directors, at least in theory, is to bring outside experience and expertise
to the board of directors. They are also expected to exert a measure of control over the executive directors to ensure that the
latter do not run the company in their, rather than the company’s, best interests.
It is important to note that there is no distinction in law between executive and non-executive directors and the latter are
subject to the same controls and potential liabilities as are the former.
(c) Shadow director
Section 250 of the Companies Act 2006, defines a director as including ‘any person occupying the position of a director, by
whatever name called.’ The point of such a tautological definition is to emphasise the fact that it is the person’s function rather
than their title that defines them as a director and makes them subject to all the rules of company law that apply to directors.
It is possible that someone who in reality exercises control over a company’s decision making might seek to evade their
responsibilities and potential liabilities as a director. For example they could attempt to do this by appointing some other
people as nominal directors without themselves being formally appointed to the board of directors. They would, nonetheless,
exercise control over the business. It was in order to regulate such potential activity by those who exercise control over
companies from behind the scenes that the concept of the shadow director was introduced. Thus s.251 of the Companies
Act 2006 provides that a shadow director in relation to a company, means a person in accordance with whose directions or
instructions the directors of the company are accustomed to act. However it should be noted that a person is not to be
regarded as a shadow director simply for the reason that the directors act on advice given by him in a professional capacity.
Thus neither accountants nor lawyers are made liable on the simple basis that they provide advice which the board of directors
may act on.

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