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A lot of businesses out there will be set up as shown below - in our example, we have 3 owners (shareholders) and 3 directors. Each person might be contributing a different amount of money, and might have different roles of the business.
It’s important to realise that although all 3 people are involved in the business, they have different roles as shareholders and directors.
Area | Shareholder | Director |
Ownership | Own the company | Have no ownership interest (unless they are also a shareholder) |
Management decisions (day to day running of the business) | No decisions to do with management (except for a handful of important decisions) | Responsible for day to day running of the business |
Interests | Can act in their own best interests | Must act in the best interests of the company (even when this is in conflict with their own personal interests). |
Should shareholders be directors (and should directors be shareholders)?
There’s an argument to be made that especially in small businesses, it is a good idea for those involved in the business to be both shareholders and directors.
If someone, say Kendrick, owns part of a business, he has a vested interest in making that business work and he’ll roll up his sleeves to get the job done. In this way, the self-interest of the directors and those of the shareholders become one and the same - they’re linked and follow the same path (you’d hope).
This question really turns on a practical question - what is each person actually going to do in the business?
If someone is going to be actively involved in the business day to day (say, making pizzas in a pizza joint, setting the menu, choosing the fitout for the store) and is also tipping in money, then it makes sense for them to be both a shareholder and director (and, a kick-ass pizza chef).
On the other hand, his business partner has a full time job and just wants to invest some money (and get the occasional slice on the house). He wants to get a share of the profits at the end of the year, but he doesn’t have time to commit to the business. He might consider being a shareholder only.