The Importance of Establishing a Functioning Board of Directors for a Start-up Company

The British Columbia Company Act requires that every company must have a least one director and a reporting company (i.e. publicly traded) must have at least three directors. The Company Act also provides that every company must have a president and a secretary, who, except in a company with only one member, must be different persons. A person must not be the chair of the directors or president of a company unless the person is a director of a company.

While in a startup situation the founder of the company generally performs the role of president and director, it is important to establish a board of directors that is able to act independently of the president. As noted by D.J. Doyle in his book, "Making Technology Happen", "A good board of directors is as important as a good management team, a good business plan and good investors."

As Mr. Doyle points out, "one of the critical roles of the board is to ensure that management is continuously following a plan that is attainable." So often people fall into the trap that once a company reaches a certain stage, then it will put a board together and so forth. This sort of reasoning is fallacious. For instance, when shooting a gun a slight change in the direction of the barrel can make quite a large difference of where the shot will finally end up.

An independent board of directors ensures a higher degree of objectivity and puts checks and balances in place (such as at least two signing authorities on bank accounts). One of the common problems facing a startup business is shortage of capital, giving rise to the temptation to cut corners or make other decisions based on immediate financial concerns rather than what is best for the company in the long run.

A good board of directors can be a sounding board for the President. The board is not there to hinder management's progress, but to succeed ultimately requires a team effort and few, if any, people possess all the various attributes and skills needed to grow a startup concept or business into a going concern.

Prospective directors should be advised of their duties and liabilities and should hold regularly scheduled meetings with a formal agenda. In other words - think and act like the company that you wish to become. One of the most important elements for any board is to be able to operate independently of management and to spot problems well enough in advance to deal with them. Even in cases where there is a properly constituted board in many cases the board members are dominated by the president who may also be a major shareholder. It is important to establish the expectations and relationship (e.g. method and timeliness of communication) at the outset. This is a requirement set out in the Corporate Governance Guidelines for TSE listed companies - but applies equally to startup ventures.

A properly constituted and functioning board will likely be able to avert many problems that plague startup companies (e.g. payments/benefits from the company to insiders).

The foregoing is not intended to constitute legal advice and is intended to be of a general nature. Persons who are directors or are contemplating becoming a director or otherwise requiring legal advice should seek consultation from a legal advisor with respect to their specific situation.

Kim Johnson
Ross Johnson and Associate
Barristers and Solicitors
1521 Amelia Street
Victoria, BC V8W 2K1
Phone: (250) 381-7677
Fax: (250) 381-7657