What Are Directors’ Interests?
Directors’ interests mean the shares, options, and debentures a director owns in the company where they work as a director. These interests must be told to all people who care about the company. The law says directors must tell everyone about what they own in their company.
A director is a person who helps run a company. Directors make big choices about how the company works. They sit on the board of directors. The board is a group of people who make rules for the company.
Directors can own parts of the company. They can own shares, which are small pieces of the company that people can buy. Directors can also own options, which let them buy shares later at a set price. Directors can also own debentures, which are loans that directors give to the company.
The law says directors must tell everyone about these things they own. This helps make sure directors act in ways that are good for the company.
Why Directors’ Interests Matter
Directors’ interests matter because directors make big choices for the company. These choices can change how much money the company makes. These choices can also change how much the shares are worth.
If directors own many shares, they might want to make choices that make the shares worth more money. This can be good for all people who own shares. But sometimes directors might make choices that help them but hurt the company.
This is why everyone needs to know what directors own. When directors tell everyone what they own, people can check if directors are making good choices. People can see if directors are helping themselves or helping the company.
The law says directors must tell everyone about what they own. This law helps keep directors honest. The law helps make sure directors work hard to help the company grow.
Rules About Telling Others
Many rules say directors must tell others about what they own. These rules come from laws and from stock markets. Stock markets are places where people buy and sell shares.
The laws are not the same in all places. Each country has its own laws about what directors must tell others. But most laws say directors must tell about their shares, options, and debentures.
Directors must tell about what they own when they start working as a director. They must also tell about any changes. If they buy more shares, they must tell. If they sell shares, they must tell.
Directors must tell the company about what they own. Then the company tells everyone else. The company puts this news in reports. The company may also put this news on its website.
The time when directors must tell about changes is not the same in all places. In some places, directors must tell right away. In other places, directors can wait a few days.
Directors who do not tell about what they own can get in trouble. They may have to pay money as a fine. They may lose their job as a director. They may even have to go to jail if they break the law in a bad way.
Types of Interests Directors Have
Directors can have many types of interests in a company. The main types are shares, options, and debentures.
Shares
Shares are the most common type of interest. A share is a small piece of the company. When you own a share, you own a tiny bit of the company.
The price of shares can go up or down. If the company does well, the share price may go up. If the company does not do well, the share price may go down.
Directors often get shares as part of their pay. Sometimes they buy shares with their own money. Directors may want to own shares to show they believe in the company.
When directors own many shares, they may care more about how well the company does. This can make them work harder to help the company grow.
But directors who own many shares might also take too many risks. They might try to make the share price go up fast. This could hurt the company later.
Options
Options are another type of interest. An option gives a director the right to buy shares later at a set price.
For example, a director might get an option to buy shares at $10 each in two years. If the share price goes up to $15 in two years, the director can use the option to buy shares at $10. Then the director can sell the shares at $15 and make money.
But if the share price stays at $10 or goes down, the option is not worth much. The director would not make money by using the option.
Companies give options to directors to make them want to help the company grow. If the company does well and the share price goes up, directors with options make more money.
Options can be good because they make directors want the company to do well for many years. But options can also make directors take too many risks to make the share price go up.
Debentures
Debentures are a less common type of interest. A debenture is a loan that someone gives to a company. The company must pay back the loan plus extra money called interest.
Directors sometimes give loans to their company. This can happen if the company needs money fast and cannot get a loan from a bank.
When a director gives a loan to the company, the director has a debenture interest in the company. The director wants the company to do well so it can pay back the loan.
Debentures can be good because they show the director believes in the company. But debentures can also be bad if they make the director care more about getting the loan back than about helping the company grow.
How to Find Out About Directors’ Interests
People who want to know about directors’ interests can look in many places. Companies must tell about directors’ interests in reports and other papers.
Company Reports
Companies write reports about how they are doing. These reports often tell about directors’ interests.
The yearly report is a big report that comes out once a year. It tells about how the company did that year. The yearly report always has a part about directors’ interests.
The part about directors’ interests shows how many shares, options, and debentures each director owns. It may also show changes from last year.
The yearly report is a good place to start if you want to know about directors’ interests. But the news in the yearly report may be old. The directors may have bought or sold shares since the report came out.
Company Websites
Many companies put news about directors’ interests on their websites. The news on the website may be newer than the news in the yearly report.
Companies often have a part of their website for news. This part may tell when directors buy or sell shares. It may also tell when directors get new options.
Companies also often have a part of their website for papers they send to the stock market. These papers may tell about directors’ interests.
But not all companies put the same news on their websites. Some put more news than others. Some put news faster than others.
Stock Market Websites
Stock markets are places where people buy and sell shares. Stock markets have rules about what companies must tell them.
When directors buy or sell shares, the company must often tell the stock market. The stock market then puts this news on its website.
Stock market websites can be good places to find news about directors’ interests. The news on these websites is often new. But the news may be hard to find if you do not know where to look.
News Websites
News websites sometimes write stories about directors’ interests. These stories often come out when a director buys or sells many shares.
News websites may tell why a director bought or sold shares. They may also tell what other people think about what the director did.
But news websites do not write stories about all changes in directors’ interests. They only write about big changes or changes that seem odd.
What Directors’ Interests Tell Us
Directors’ interests can tell us many things about a company and its directors. But we must be careful not to think they tell us more than they do.
Trust in the Company
When directors own many shares, it may mean they believe in the company. They think the company will do well and the share price will go up.
When directors buy more shares with their own money, it may mean they think the shares are cheap. They think the share price will go up soon.
But when directors sell shares, it does not always mean they do not believe in the company. Directors may sell shares for many reasons. They may need money to buy a house or to pay for school for their children.
Plans for the Future
Changes in directors’ interests may tell us about plans for the company. If many directors buy shares at the same time, they may know good news is coming soon.
If many directors sell shares at the same time, they may know bad news is coming soon. But selling shares based on news that other people do not know is against the law in many places.
Sometimes a new director buys many shares when they start working for the company. This may mean the new director has plans to help the company grow.
Problems to Watch For
Sometimes changes in directors’ interests can tell us about problems. If a director sells many shares, it may mean the director thinks the company will have problems soon.
If a director buys shares in another company that works in the same way, it may mean the director thinks the other company will do better.
If a director buys or sells shares right before big news comes out, it may mean the director is using news that other people do not know. This is against the law in many places. It is called insider trading.
Good Ways to Tell About Directors’ Interests
Companies can tell about directors’ interests in ways that help people learn more. Some ways are better than others.
Clear Reports
Reports about directors’ interests should be clear and easy to read. They should not use hard words that most people do not know.
Reports should show how many shares, options, and debentures each director owns. They should also show changes from last time.
Reports should tell when each change happened. They should tell if the director bought shares, got shares as pay, or got shares some other way.
Good reports may also show how much of the company each director owns. This can help people see which directors have the most interest in the company doing well.
Fast News
News about changes in directors’ interests should come out fast. If news comes out late, people may not be able to use it to make good choices.
In some places, the law says how fast companies must tell about changes. But even if the law gives companies many days, good companies tell as fast as they can.
Good companies put news about directors’ interests in places where people can find it easy. They do not hide the news in long reports or hard-to-find parts of their website.
Full Stories
Good news about directors’ interests tells the full story. It does not leave out facts that might help people learn more.
When a director buys or sells shares, good news tells how many shares and how much money. It tells when the change happened and if the change was big or small for that director.
Good news may also tell why the director bought or sold shares. Did the director need money for something else? Did the director think the shares were cheap or costly? Did the director have to sell shares because of a rule?
Problems With Directors’ Interests
Directors’ interests can cause problems for companies. Good companies try to stop these problems before they start.
Caring About the Wrong Things
When directors own many shares, they may care too much about the share price. They may want the share price to go up fast.
This can make directors care less about other things. They may care less about making good things for people to buy. They may care less about helping workers or keeping the world clean.
To stop this problem, companies can make rules about how many shares directors can own. Companies can also make sure directors get pay in other ways, not just shares.
Taking Too Many Risks
Directors with many shares or options may take too many risks. They may make choices that might make the share price go up fast but could hurt the company later.
For example, a director might say the company should spend all its money now to grow fast. This might make the share price go up now. But if the company needs money later and has none left, it could go out of work.
To stop this problem, companies can make rules about what risks directors can take. Companies can also make sure directors think about what might happen many years from now, not just now.
Hiding Changes
Sometimes directors try to hide changes in what they own. They may not want other people to know they are buying or selling shares.
Directors might try to hide changes because they know news that other people do not know. Or they might try to hide changes because they do not want people to think they do not believe in the company.
To stop this problem, companies and stock markets can check if directors are telling about all changes. They can make directors pay big fines if they hide changes.
How Rules Are Different Around the World
Rules about directors’ interests are not the same in all places. Each country has its own rules. Even parts of the same country may have different rules.
United States Rules
In the United States, the main rule about directors’ interests comes from a law called the Securities Exchange Act. This law says directors must tell about what they own and about changes.
Directors must tell the Securities and Exchange Commission when they buy or sell shares. The Securities and Exchange Commission is a part of the government that makes rules about shares.
Directors must tell within two days after they buy or sell shares. They must fill out a paper called Form 4. This paper tells how many shares they bought or sold and how much money they paid or got.
The United States also has rules about when directors can buy or sell shares. Directors cannot buy or sell shares at some times, like right before the company tells big news.
United Kingdom Rules
In the United Kingdom, the main rules about directors’ interests come from the Companies Act and from the Financial Conduct Authority. The Financial Conduct Authority is a part of the government that makes rules about money.
Directors must tell the company about what they own and about changes. The company must then tell the stock market. The stock market puts the news on its website.
Directors must tell the company as soon as they can about changes. The company must then tell the stock market by the end of the next day.
The United Kingdom also has rules about when directors can buy or sell shares. Directors cannot buy or sell shares at some times, like when they know news that other people do not know.
Other Places’ Rules
Rules about directors’ interests are different in other places. Some places have more rules than the United States and the United Kingdom. Some places have fewer rules.
In some places, directors must tell about what their husband or wife or children own. In other places, directors only need to tell about what they themselves own.
In some places, directors must tell right away about changes. In other places, directors can wait many days or even weeks.
Some places are making new rules to make directors tell more about what they own. They think more rules will help keep directors honest.
Changes in Rules Over Time
Rules about directors’ interests have changed over time. In many places, the rules have become stronger. This means directors must tell more about what they own and must tell faster.
Rules have become stronger because of problems at some companies. At these companies, directors made bad choices that hurt the company. Some of these directors had not told the truth about what they owned.
After these problems, many places made new laws. These laws made directors tell more about what they owned. The laws also made bigger fines for directors who did not tell the truth.
Some people think the rules should be even stronger. They think directors should tell even more about what they own. They think directors should tell even faster about changes.
But other people think the rules are already strong enough. They think more rules would make it hard for directors to do their jobs. They think more rules would cost companies too much money.
What Good Companies Do
Good companies do more than just follow the rules about directors’ interests. They try to be very open about what directors own. They try to make sure directors make good choices for the company.
Good companies have their own rules about directors’ interests. These rules may be stronger than the law. For example, a company might make directors tell about changes the same day, even if the law gives them more time.
Good companies make sure all directors know the rules. They teach new directors about the rules. They remind all directors about the rules many times each year.
Good companies check if directors are following the rules. They look at what directors own and at changes. They ask questions if something seems odd.
Good companies put news about directors’ interests in places where people can find it easy. They put the news on their website. They put the news in reports that are easy to read.
Good companies also make sure directors think about what is good for the company, not just what is good for themselves. They talk about this when they choose new directors. They talk about this when they check how well directors are doing their jobs.
What to Look for as Someone Who Cares
If you own shares in a company or think about buying shares, you may want to look at directors’ interests. Here are some things to look for.
Do directors own many shares? If they do, they may care more about making the company do well. But they may also take too many risks.
Are directors buying more shares with their own money? If they are, they may think the shares are cheap. They may think the company will do well soon.
Are directors selling shares? If they are, they may think the shares are costly. They may think the company will not do well soon. But they may also need money for other things.
Do all directors own about the same number of shares? If some own many more than others, the ones with many shares may have more say in what the company does.
Has a director bought or sold many shares at once? If a director has, something big may be happening at the company. Or the director may just need money for something else.
Do directors tell about changes fast? If they do, the company may be more open about other things too. If they do not, the company may be trying to hide other things too.
Why We All Should Care
Directors’ interests matter to many people, not just to people who own shares in the company.
Directors make big choices that change how companies work. These choices can change how much money companies make. They can change what things companies make for people to buy. They can change how many people work at companies.
When directors own many shares, they may make different choices than when they own few shares. They may care more about making the share price go up. They may care less about other things.
This can be good if it makes directors work hard to help the company grow. But it can be bad if it makes directors take too many risks or care only about money.
Rules about directors’ interests help keep directors honest. They help make sure directors make good choices for the company, not just for themselves.
When directors tell the truth about what they own, people can check if directors are making good choices. People can see if directors are helping themselves or helping the company.
This helps make companies work better. It helps make sure companies make good things for people to buy. It helps make sure companies treat workers well. It helps make sure companies keep the world clean.
All people, not just people who own shares, want companies to work well. All people want to buy good things. All people want companies to treat workers well. All people want companies to keep the world clean.
This is why rules about directors’ interests matter to all people. The rules help make sure directors help their companies be good for all people.
