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Selecting Directors of a Company

By Kornfeld LLP (posts)

In a previous article, we considered some of the situations in which a closely-held company might wish to expand its board.  This article will go on to consider how to identify possible board candidates.

Selecting board candidates is a process not to be taken lightly.  A company’s directors are responsible for setting its direction and maintaining its corporate governance standards – so the composition of a company’s board can have long-term implications.  If you simply plan to formalize an existing mentorship or adviser role, or if a large investor has negotiated a board seat as one of its investment conditions, you may know already who the director candidate is.  However, in all other cases, identifying suitable candidates is an important step.

The basic requirements for eligibility as a director under the Business Corporations Act (British Columbia) are that the director candidate:

  • is at least 18 years of age;
  • has not been found by a court to be incapable of managing his or her own affairs;
  • is not an undischarged bankrupt; and
  • has not been convicted of an offence in connection with the promotion, formation or management of a corporation or unincorporated business, or an offence involving fraud, with a few exceptions (including the person having received a pardon under the Criminal Records Act (Canada)).

Directors of BC companies are not required to be Canadian residents.  This is, however, not the case for corporations organized under the Canada Business Corporations Act, which requires 25% of a corporation’s directors to be Canadian residents.

Directors are also not required by statute to be shareholders of a company.  However, your company’s Articles may require directors to hold shares.  It is important to review your Articles to determine whether this is the case.

You may next wish to consider the strengths and weaknesses of the existing directors.  If the company’s founder is its sole director, typically that person may have industry expertise, but lack other skills – for instance, a high degree of financial literacy.  In other cases, especially if the founder is a serial entrepreneur, the founder may have excellent business skills but wish to add industry knowledge.  Since the board will set the company’s direction, oversee its finances and safeguard its governance practices, having the necessary skill set to do so is critical.

Another item to consider is your company’s goals and objectives.  Are you hoping to build a particular line of business in the next few years?  It may be useful to have a director who is knowledgeable about that line of business.  Are you intending to enter a certain market?  Having a director who knows the particular issues surrounding that market could be a determining factor in your success.

Finally, you may wish to consider independence and gender diversity when building your board.  Board independence has long been a requirement for public companies, and gender diversity is quickly becoming an important element in corporate governance best practice.  While securities laws require boards of public companies to consist of a majority of independent directors (i.e. directors who are not related to the management of the company and who have no other material relationship with the company), best practices for private issuers also require a meaningful number of independent directors.  Canadian securities regulators have also recently brought into effect “comply or explain” standards that require reporting issuers to disclose recruitment of women directors, and if no such recruitment has occurred, to explain why not.  While these diversity standards currently do not apply to companies that are not reporting issuers, it is reasonable to expect a trickle-down effect whereby investors in smaller companies will begin to demand a higher rate of diversity on boards.

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