Many companies start their lives as closely-held entities with few shareholders and only one director, who is often the company’s founder and/or principal shareholder. However, as your company grows you may find that you feel uncomfortable being the sole decision-maker, or that others are asking you to add more directors.
Of course, if your company is a closely held family business, or if you are a sole shareholder, there may never be a need to bring on additional directors. The role of a company’s directors, according to the Business Corporations Act (British Columbia), is to “manage or supervise the management of the business and affairs of the company.” If the nature and extent of your company’s business is such that this role can be carried out effectively by a single director, having one director may be sufficient. But if it appears that this role can no longer be adequately fulfilled by a single director, it is time to consider your options. The following are some situations where it may be in the company’s best interest to appoint additional directors:
- The company is seeking to attract large investors who wish to have a formal role in influencing corporate direction;
- The company is expanding either geographically or by adding new business divisions, making it desirable to add a diversity of expertise to the board;
- The company’s business is becoming more complex, making it desirable to add a range of skill sets (such as financial, legal, or industry-specific) to the board;
- You wish to formally recognize a mentorship or advisory role by appointing a mentor or adviser to the board;
- Your company’s Shareholders’ Agreement requires multiple directors;
- You wish to add independent, objective viewpoints to the board; or
- The company intends to become a reporting issuer under relevant securities law, making it necessary to raise its corporate governance standards in order to comply with best practices.
While having multiple directors generally enhances the governance of a company, this will only be the case if the directors are sufficiently knowledgeable and have the necessary skills to understand the company’s business and effectively carry out their roles. Other limitations to keep in mind include the following:
- It is generally advisable to have an odd number of directors rather than an even number, since, depending on the company’s Articles, in many cases board decisions are made by a majority of directors. Having an odd number eliminates the uncertainty that could occur if a board decision is split 50/50.
- The number of directors that your company may have might be limited by the provisions of your company’s Articles. It is worthwhile checking the Articles to determine if they contain any restrictions in this regard, and whether your Articles need to be amended before appointing additional directors.
- Typically, directors are elected by the shareholders of the company who hold shares that carry voting rights. Depending on the number of shareholders in your company, it might be necessary to hold a shareholders’ meeting at which the new directors are elected.
- If a company has too many directors, the governance benefits experienced by having a diverse board could be hampered by inefficiency. In all but the largest companies, typically it is not necessary to have more than five directors.
In a future article, we will consider the types of individuals you may wish to appoint as directors.