The managing director plays a crucial role within any corporation, large or small, either alone, or as a member of a board of directors. This crucial role has everything to do with the fact that the managing director actually is the person running the business of the corporation. For a better understanding of this role, let us go back to the origin of the corporation.
The first corporation to be established, and to issue shares, was the Dutch VOC “Vereenigde Oostindische Compagnie” (United East India Company), established in 1602. Basically, this company was structured as an association of shareholders. The company had as its goal to bring together Dutch merchants moving goods (spices, for instance) to and from the Far East, as former competitors. They became partners as shareholders of this company, in order to be more competitive, and to regulate supply and demand of goods. This new ‘legal person’ acquired official recognition from the royal authority to operate as a monopoly on the Far East trade, as far as Dutch commerce was concerned.
What was, back then, this association-like structure? First of all, like an association, the highest internal body within the corporation was the General Meeting of Shareholders, to be compared with the members of an association, with certain voting rights. This meeting had the power – as in any association - to appoint, suspend and dismiss the (managing) director, or Board of directors, who is/are responsible to conduct the business on behalf of the shareholders. Also, this director or board of directors is/are representing this legal person in all of its affairs. On the other hand, the ‘members’ of the ‘association’ cannot represent the legal person in any way. Hence, the ‘limited liability’ of the shareholders, who can only be liable for the value of their share, not for the liabilities within the business itself.
Based on an annual report of the state of affairs of the company, the meeting of shareholders could then evaluate the company’s performance, and establish a dividend to be distributed among shareholders, depending on the profit to be made in a particular year.
This basic model has survived for centuries, although modifications of all sorts have been tried out throughout the world. For instance, very large companies felt the need to have a supervising body overlooking how managing directors would operate the business throughout the year, and would not depend solely on the annual financial statement to judge on management’s performance. Thus, the two tier model appeared, including a supervisory board in the equation, with certain powers to supervise and inquire within the business, and intervene if necessary.
As the shareholder himself is not be involved in operating the business, and hence will not be liable for things going wrong within the business, the liability for improper management, for instance, rests on the shoulders of the managing director. The managing director can be held (personally) liable for the damage the company may have suffered, and, in case of bankruptcy, he may be even held liable for the entire deficit of the estate.
Also, the corporation - in various forms throughout the world - has been used for small businesses, where this strict separation of responsibilities in large corporations becomes more blurred, and thus sometimes leading to confusion. What happens when someone is both (sole) shareholder, and managing director of his own company? Will he, at all times, be aware of the different roles he is playing in a legal sense, and know when to distinguish between these roles, in spite of being the same natural person acting? Let us have closer look, then, to the roles involved, of the managing director.
Role of the managing director
The managing director plays a pivotal role in the organization. Representing the interests of management itself, and the shareholders, the managing director must balance competing sets of responsibilities in order to successfully contribute to company performance.
The managing director is responsible for making policies and good governance process. He also holds the position of trusteeship to protect and enhance shareholder value through strategic management and governance. The managing director has great freedom to think, decide and act in the best interest of the company and stakeholders. The managing director’s responsibilities demand the exercise of judgment for which he necessarily has to be vested with powers and a reasonable level of discretion.
The rights of the managing directors can be categorized in individual rights (civil rights), and if the managing director is also an employee, in labor laws. One must always be aware that, depending on the articles of incorporation and the employment contract, different legal discharge regulations may apply.
The managing director is also legally authorized to represent the corporation. He has collective responsibility when two or more managing directors are appointed. To some extent, they all are individually responsible for the affairs of the company, but their individual responsibilities depend on the stipulations of the articles of incorporation.
Management Liability for tax debts
Liability of managing directors also occurs when tax liabilities are not reported on time. If the company cannot comply with its turnover or payroll taxes, the managing director is liable in this sense.
Even if a managing director reports on time, he is still likely to be held personally liable, when the Tax Collector’s Office has reason to believe that failure to pay is due to apparent improper management on behalf of the of the managing director(s) for 3 years prior to the date of the notice. The burden of proof rests on the tax maladministration.
If the managing director does not respond in time, the managing director is faced with a legal presumption that no payment is due to apparent mismanagement during the aforementioned period. In this situation, directors' liability in private is almost impossible to avoid.
Directors have privileges that are conferred on them by the articles of incorporation of the company, which may vary. These privileges may include:
• to summon shareholders with respect to money unpaid on their shares;
• to issue debentures, or attract moneys in other ways, to invest the funds of the company, and to make loans.
Certain restrictions can be imposed on the general privileges of the managing director, and invariably they have to seek the approval of shareholders in the General meetings in such cases. And, there may be certain privileges which can be exercised only with the approval of the shareholders. All depends, again, on the stipulations laid down in its articles of incorporation. If approval of the shareholders is necessary and the managing director takes action without consulting with them first, then the consequences can be far reaching for which he might be held personally liable for his actions and any debt incurred.
Finally, let us return to the situation in smaller companies, where the same individual person is both shareholder, and managing director. When exercising certain responsibilities, or privileges that are strictly assigned to one or the other, this person must be aware of the position he is in, and which powers he is about to exercise. For example, when a sole shareholder, and sole managing director, decides to appoint another managing director, he cannot administer this as a decision made by himself as the managing director.
Proper documentation – the minutes - is necessary of the ‘shareholders’ meeting’ held on a certain date, at a certain place, and giving notice of the business conducted at the meeting, even if physically no real meeting was held.
This to underscore, that the proper body within the legal person adopted a legally correct resolution. Nowadays, this person will sit at his desk and most probably use a digital model of the minutes to prepare this document, which later on should be submitted to the public registry responsible for filing this. In many countries, this task is given to the Chamber of Commerce.
The consequences of not doing things the right way are sometimes small, and sometimes far reaching. When accepting the position of a managing director, beware of the pros and cons as mentioned in this article. Proper information is always available at the Chamber.