The decision usually arrives with a trigger: an investor's due diligence request, a first senior hire, a co-founder's departure, or a lender asking who actually runs the company. Up to that point the titles on the letterhead have been decorative and nobody has minded. From the moment a third party starts checking, the difference between an executive director and a managing director stops being a naming question and becomes a question about who holds legal office, who carries legal duties, and who is allowed to commit the company to something.
The options on the table
The first thing to recognise is that the two titles are not rivals. A managing director is a board-appointed office. Under s 201J of the Corporations Act 2001 (Cth), the directors may appoint one or more of themselves to the office of managing director, and the board can confer on that person any of the powers the directors themselves can exercise (s 198C). An executive director, by contrast, is a description rather than a statutory office: it means a director who also holds a hands-on management role, such as leading a division or a function. Every managing director is therefore an executive director in substance, because the MD is a director who runs the business. Most executive directors are not managing directors.
The real choice is not "which title" but three narrower questions: whether the person needs a board seat at all, how much power you want one person to hold, and whether your documents will say what you intend. Scale changes how much of this is worth doing. For a company of three people, the whole exercise may resolve to a single sentence in the constitution. For a business taking on investors or building a professional board, that same sentence becomes a structure worth building deliberately, because the people reading it will include people you have never met. There is also an option people assume exists but does not: appointing a managing director who is not on the board. Section 201J only allows the board to appoint one of themselves, so an MD must already be a director. The separate title of chief executive officer, used for a senior employee who is not a director, is a different creature again, though if that person acts in the position of a director the law may treat them as one regardless of what their contract calls them.
The factors that should drive the decision
Five considerations do most of the work when you are weighing a managing director, executive directors, or neither.
Does the role need to sit on the board at all?
Board office is where director duties attach. Under the definition in s 9AC of the Corporations Act 2001 (Cth), a director is anyone appointed to the position of a director, whatever their position is called, and also anyone who is not validly appointed but acts in the position of a director, or in accordance with whose instructions or wishes the directors are accustomed to act (with an exception for advice given in a professional capacity). The law looks through titles.
The practical difference between a formal appointment and acting in the position is easy to blur in a small company. Someone who consistently chairs management decisions, holds themselves out as a director to suppliers and banks, and signs on the company's behalf may be treated as a director even if the paperwork was never lodged. The definition catches conduct, not just documents.
Before you appoint anyone, decide whether the management role genuinely needs board membership. If the person only needs to run a function, an employment contract and a delegation of power from the board under s 198D may be enough, and that keeps them outside the director duties regime. If the person is effectively running the company, leaving them off the board saves nothing, because a person who acts in the position of a director can be treated as one anyway. The question is not whether you want them to have the title, but whether you are prepared for them to carry the duties that come with it.
How much power should one person hold?
The Act's default position is that the business of a company is managed by or under the direction of the directors (s 198A), and that the board may delegate its powers to a committee, a director, an employee, or any other person (s 198D). A managing director appointment is one way to package that delegation, but it is worth deciding how much of it you want in one pair of hands:
- Managing director: The board appoints a director to the office under s 201J and confers powers under s 198C. The conferral can be revoked or varied by the board at any time, and the office ends automatically if the person ceases to be a director (s 203F).
- Executive director: The person holds board office and leads a division, with powers usually delegated under s 198D and exercised subject to the board's directions.
- Neither: The board keeps the power and delegates task by task to employed managers, which suits small teams where no single executive needs standing authority.
These defaults are replaceable rules, which means your constitution can vary them, and they only apply to the extent the constitution does not displace them. If you want the managing director to have hard limits on spending, borrowing or hiring, the constitution, the board resolution appointing them, or both, are where those limits belong. The point of the exercise is that the power is conferred, not assumed, and that its boundaries are written down.
What duties and personal exposure come with the office?
Once someone is a director, the title is irrelevant to the duties that attach. The core obligations sit in ss 180-184 of the Corporations Act 2001 (Cth): to exercise care and diligence (s 180), to act in good faith in the best interests of the company and for a proper purpose (s 181), and not to improperly use their position or information (ss 182-183). These are civil penalty provisions, and the most serious breaches are criminal offences under s 184. Directors must also give the other directors notice of any material personal interest in a matter (s 191).
The exposure that worries executive directors most is insolvent trading. Under s 588G of the Corporations Act 2001 (Cth), a director can be personally liable for debts the company incurs while insolvent, or that make it insolvent, when there were reasonable grounds to suspect insolvency at the time. The care and diligence duty is qualified, not softened: a director who makes a business judgment in good faith, without a material personal interest, after informing themselves to the extent they reasonably believe appropriate, is taken to have met the standard (s 180(2)). The business judgment rule protects considered decisions, not neglect, so the practical discipline is to stay informed, ask questions and monitor what the business is doing.
Because an executive director or managing director is usually the person signing the orders, approving the payments and watching the cashflow, they are the director most likely to be in the frame when a company trades while insolvent. A non-executive director may have less day-to-day visibility, but the duty is not the MD's problem alone: every director of the company is captured by s 588G.
Who should be able to bind the company?
Signing authority is where internal assumptions collide with the outside world. Under s 127 of the Corporations Act 2001 (Cth), a company executes a document without a common seal if it is signed by two directors, or a director and the company secretary, or, for a proprietary company with a sole director, by that director where they are also the sole secretary or there is no secretary. Counterparties are entitled to assume those execution requirements were met (see the assumptions in s 129).
Section 127 governs how the company executes formal documents such as deeds, guarantees and major contracts. Everyday orders and supply arrangements are usually made by an individual under delegated authority rather than executed by the company at all, and that is where the gap between title and power does its damage. A counterparty does not check the minute book before accepting a signature; it relies on who appears to run the company.
That is the statutory floor. Above it, you decide how much more authority an executive carries: contract signing limits, spending caps, who can open bank accounts, who can hire and fire. If the only record of those limits is tribal knowledge, a supplier, bank or employee who relied on the managing director's apparent authority can leave the company bound to something the board never approved. The board resolution that confers the powers, and the delegation policy made under s 198D, are the records that prevent that.
Does the paperwork match the title?
Finally, check what is actually on the public record and in the minute book. Within 28 days of appointing a director, the company must lodge a notice in the prescribed form with ASIC (s 205B of the Corporations Act 2001 (Cth)), so the register should show who holds office, not who the letterhead suggests does. The constitution and any replaceable rules that apply have effect as a contract between the company and each director (s 140), which is a strong reason to set the boundaries of the managing director's role there rather than leaving them to conversation.
A board resolution should record the appointment, the powers conferred, the spending and signing limits, and the reporting obligations. The executive's service agreement should record the employment side: title, reporting line, duties, remuneration, confidentiality, intellectual property and any restraints. When an investor, lender or liquidator later asks who was responsible for what, these are the documents they will pull out, and the answer should be the same in every one of them.
How an Artificer Legal practitioner can help you make the call
The choice between a managing director and executive directors is usually made quickly and documented slowly, which is exactly the wrong order. An Artificer Legal practitioner can sit with the founders and map who actually makes decisions today, then stress-test that against the legal structure: whether someone is already a de facto director, whether the power you intend to give one person is proportionate to the role, and what the downside looks like if the company trades while insolvent and a liquidator starts asking who signed what.
Once the structure is agreed, the same practitioner can draft the documents the chosen path needs: a constitution that displaces the replaceable rules where you want tighter controls, a board resolution appointing the managing director with defined powers and limits, a delegation policy under s 198D, and an executive service agreement that matches the title to the reality. They can also check the ASIC lodgements and the minute book so the public record matches the decision. If you are weighing this now, that is the point where advice is cheapest: before the title goes on the letterhead, not after a dispute or a liquidator's report makes the question urgent.
Document the power, not just the title
The most expensive misunderstanding in this area is the assumption that a title creates power. It does not. A managing director has only the powers the board has conferred under s 198C, and those powers have substance only where the conferral is recorded. The duties run in the opposite direction: they attach by operation of law to anyone who acts as a director, whatever their title says, under s 9AC. The title is the part you get to choose. The duties are the part you do not.
The practical summary is this. Decide first whether the role needs a board seat, then how much authority one person should hold, then look squarely at the exposure that comes with the office, then fix who can sign for the company, and finally make the constitution, board resolutions, agreements and ASIC records say what you decided. If a title and a document disagree, the document is what a court, a lender or a liquidator will read, so make sure the two never get the chance to part ways.