A company is a legal entity and there are many things that it can’t do. It can’t get married, dance, or die. There are however many things that it can do, thanks to its directors and shareholders, who act as the hands and feet of the company. Directors and shareholders both have important, but very different roles.
While it is possible for one person to be a director as well as a shareholder, they cannot wear both hats at the same time.
Let’s have a look at the difference between these two very crucial role players within a company structure. Keep in mind that we’ll be discussing the differences in the context of private companies. For the purposes of this article, the director hat is red, and the shareholder hat is blue.
So what are the differences between shareholders and directors?
Basic overview
SHAREHOLDERS | DIRECTORS |
Shareholders are, (you guessed it!), the holders of the shares in the company. In other words, they are the owners of the company. | The directors are in charge of the management of the company. Of course, they don’t do everything in the company; that’s what employees are for. |
How do they make money?
SHAREHOLDERS | DIRECTORS |
Shareholders can get dividends for their shares. | Directors can get paid for the service they render as directors. |
Who decides who's who?
SHAREHOLDERS | DIRECTORS |
Shareholders can be shareholders either because they started their own company, or because they bought into a company. | Directors are appointed by shareholders. Because the shareholders get to decide who the directors are, it is common, especially in private companies, that some/all of the shareholders are also directors. In that case, it is critical to keep track of who is wearing which hat, and when. |
What are their responsibilities?
🤓 NERD WORD ALERT: FIDUCIARY DUTY
A fiduciary duty is a duty to act in the company’s best interest. This is really important to know because it is a BIG difference between a shareholder and a director. Shareholders don’t have fiduciary duties toward the company; while directors do. What if you’re both? Good question! Remember that we mentioned you can’t wear two hats at the same time? This is exactly where that comes in:
When you’re wearing your blue hat; you can be selfish as heck. When you vote, you can with pretty much only yourself in mind.
When you’re wearing your red hat, you’re legally obligated to put your own interests at the back of the line; the interests of the company come first.
SHAREHOLDERS | DIRECTORS |
Depending on the content of the shareholders agreement, the shareholders can be responsible for:
| Directors’ responsibilities are way more complicated. In short, directors must do their jobs as decision-makers in an honest and informed way to the benefit of the company. Go have a look at our article about directors’ responsibilities here. |
If things go south, how are they held accountable?
SHAREHOLDERS | DIRECTORS |
As mentioned above, shareholders don’t have a fiduciary duty to the company. As a result, their liability is also pretty limited. There are however a couple of instances where they can be held liable for debts upon the liquidation or deregistration of the company. | In line with section 77 of the Companies Act, directors can be held liable for any loss, damages or costs sustained by the company as a result of any breach of their duties as directors. This sounds scary (and it can be!), but there are many hoops you’ll have you jump through before being able to hold a director liable in this way. |
Can only individuals be a director or a shareholder?
SHAREHOLDERS | DIRECTORS |
Companies or individuals can be shareholders in companies. That sounds confusing! This means that:
Because we know that companies need individuals to act as their hands and feet, we also know that John’s Garden Services will have to authorise an individual to act on its behalf. | Only individuals can be directors. |
Anything else worth mentioning?
When considering the differences between shareholders and directors, it’s not only important to look at what they do, but also how and why they do what they do.
SHAREHOLDERS | DIRECTORS |
Shareholders can be selfish. They only have to think about their own interest, which typically comes down to money money money (♫) | Mother Theresa over here — directors have to consider all other parties (the company, the shareholders, the employees) before themselves. |
Shareholders don’t have a fiduciary duty towards the company. | Directors have a fiduciary duty towards the company. |
Shareholders can, interestingly enough, be forced to vote in a certain way within the context of the company. In other words, it is possible to take their discretion away. Quick example: a shareholders’ agreement might contain a clause that forces you to vote in favour of a shareholder selling their shares. | Because of this fiduciary duty, a director’s discretion cannot be taken away. You can’t force them to vote in a certain way, because they’re legally obligated to act and vote in a way that they believe is in the best interests of the company. |
And that’s a wrap! Those are the biggest differences between shareholders and directors; two very important role players in every company. If you’d like to know more, please reach out to us – we have much more to share.
If you're in the process of figuring this out for your own company or you've been invited to become a director or shareholder and want to find out more, click the button below to book a free consultation with us. We'd love to work with you.
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