Shadow Directors: What Is A Shadow Directorship & How To Avoid It?

Boards are at the heart of company governance. They play a critical role in making strategic decisions, managing risks and providing oversight and accountability, and can have a significant role in shaping the company’s overall performance and impact. With great power comes great responsibility for the company Directors, but watch out: it also comes to shadow directors. Sometimes the lines get blurred and a well-intentioned share-holder, board advisor or interim manager, could inadvertently find themselves in a shadow directorship position.

So, what is a shadow director?

You may have heard the term ‘shadow director’ in passing but very few people know what it actually is and the problems this role can bring with it. In a nutshell, a shadow director is a person that has significant influence over a company’s affairs without being formally appointed as a director. For example, managing the business activities of a company, approving expenditures, hiring senior members of staff, making significant strategic decisions, securing loans and borrowing on behalf of a business or being responsible for an entire area of the business can all lead to you winding up in the shadow director role by default.

A shadow director is bound by the same responsibilities and liabilities as an appointed director listed on Companies house.

A common problem is that most people in this situation are unaware they are a shadow director and therefore don’t know they have to comply with the laws relating to directors. This leads to them taking no protective action. To make matters worse, since they are not an appointed director, they may not be covered by the company’s directors’ and officers’ liability insurance (if any) and the customary indemnity companies provide to their directors. This can leave them exposed to some serious consequences should the worst happen, including criminal sanctions and personal liabilities for breaching their directors’ duties. They can also be disqualified from being a director altogether and be held personally liable to contribute to the company’s assets following its insolvency.

How can you protect yourself?

You don’t know what you don’t know, right? Surely you can plead ignorance? Not in this case. A lack of formal appointment provides no protection against these penalties and there’s a high chance that ignorance of the role may not be accepted as a legal defense either. 

In an ideal world, companies should be careful to identify shadow directors and ensure that all legal requirements are fulfilled. However, this isn’t always the case so the onus falls on you as an individual to protect yourself against an unwanted shadow directorship.  

The good news is there are things you can do to avoid becoming a shadow director. Here’s some examples: 

  • When you attend board meetings, remember you are only there to advise and not direct. If you are not in an official director post, don’t behave like a director. Make it clear when you put forward suggestions that your intention is not to make any decisions or give instructions to the company. 
  • Only exercise the authority given to you by the board and make sure you refer all significant matters back to the board for any final decisions. 
  • A clear and practical way of making the limitations of your role clear is to take part in discussions and provide advice but to physically step out of the boardroom when any decision-making is taking place. The minutes of the board will record this so make sure you keep a copy of them. 

So, shouldn’t everyone in the boardroom be an appointed director?

Not necessarily! Many organisations seek input at board level from people who aren’t directors, and that’s perfectly acceptable. One example is family owned businesses: they may wish to retain full control of the business within the family, but gain insights from those who are outside of the family and can bring skills and experiences they don’t otherwise hear at board level. At Dynamic Boards we advertise non-executive board roles, and this includes Board Advisor roles too. The key to avoid straying into the murky role of the shadow director is to make sure that all parties understand what a board advisor can and can’t do.

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