What is a De Facto Director?
A de facto director (a director in fact) is an individual who acts as a company director despite not being formally appointed or registered in official corporate documents. They actively set the company’s strategic direction and make decisions on its behalf. Although unofficial, a de facto director has the same authority and responsibility as an elected and formally appointed (de jure) director. This means that they are also just as liable for their actions.
De Facto Director vs Shadow Director
Although there might be some overlap, a key differentiator is that a de facto director openly behaves as a director and represents themselves in a public setting, while shadow directors do not. Both, however, are subject to the same statutory obligations and are personally liable under state laws for any breach of those duties.
How is a de facto director created?
There is no definite process for a person becoming a de facto director. However, when an individual starts to perform a list of functions associated with a director, they may be considered one. Some reasons that cause a de facto director to be formed include active participation, assumption of responsibilities, and representation to third parties.
Furthermore, in cases where the organization is in problematic situations or does not have a key leader, a de facto director may arise.
What does a de facto director do?
De facto directors must comply with the same duties as a duly assigned director. These responsibilities include:
- Overseeing the company’s operations: This includes managing the company’s finances, hiring, and business strategy. They may also be involved in the business on a board level. For example, attending and influencing board meetings.
- Making high-level decisions: They are responsible for making key strategic decisions that shape the direction of the company, such as approving major investments, expansions, or restructuring plans.
- Fulfilling all the fiduciary duties and responsibilities: They are expected to act in the best interest of the company without any encumbrances, such as conflicting interests or exposure of governance secrets. Liabilities for breach or misconduct apply.
What are the risks of a de facto directorship?
First, this narrows the lines of authority, which leads to confusion and the possibility of disputes among members and disruptions in the management of the company. Second, the risk of having poorly made decisions and mismanagement rises because people might act without accountability. Last, since de facto directors are subject to the same duties and liabilities as the formally appointed directors, it may compromise the legal and financial security of the company.
To avoid these risks, consider these tips:
- Establish a clear distinction of responsibilities and ensure their work aligns with their job descriptions. Perform periodic review evaluations and regular reports of the work to monitor performance and compliance.
- Control the financial authority of non-directors by setting spending limits and restricting access to company accounts and assets.
- Always formalize appointments and clearly define roles. Make sure that everyone is made aware of the hierarchical structure and decision-making boundaries.
- Limit the access of non-directors to information available at the board level.