Board governance for private companies

Private company boards are often treated as a formality, right up until an investor, a lender or a plaintiff treats them as anything but.

What directors owe

Under Canadian corporate statutes, directors owe two duties: a fiduciary duty to act honestly and in good faith with a view to the best interests of the corporation, and a duty of care to exercise the care, diligence and skill of a reasonably prudent person in comparable circumstances. The first is owed to the corporation, not to any shareholder who appointed them, which is the point most frequently misunderstood by directors nominated by an investor.

Courts have generally been reluctant to second-guess business decisions made on a reasonable, informed basis. That deference depends on process: directors who inform themselves, take advice where appropriate, and record their deliberations are in a materially better position than directors who did the same thinking without a record of it.

Where liability attaches personally

Several statutory liabilities fall on directors personally, which is what makes the role different from advising. The recurring ones in Canadian practice include unpaid employee wages and vacation pay to a statutory limit, unremitted source deductions and sales taxes, and various environmental and occupational health and safety obligations depending on the business. Directors also face oppression claims, which are available to a broad class of complainants and are the most common vehicle for shareholder disputes in Canada.

Take the appointment seriously or do not take it. A director title with no meetings, no minutes and no insurance is exposure without the benefit of governance.

Protection that should be in place before you accept

• Directors' and officers' insurance, confirmed as in force and extending to the individual, with the policy limits and exclusions actually reviewed.
• An indemnity agreement with the corporation, going beyond the statutory minimum where permitted.
• Access to information: financial statements on a defined cadence, and the ability to ask for more.
• A clear understanding of what is reserved to the board versus the shareholders, particularly where a shareholders' agreement shifts decisions.

Where a unanimous shareholders' agreement restricts the directors' powers, the shareholders assume the corresponding duties and liabilities to the extent of the restriction. That is a meaningful allocation, and directors should know whether one exists before they are appointed.

What a functioning private board actually does

Four meetings a year with an agenda circulated in advance, materials distributed early enough to be read, and minutes that record decisions and the basis for them. Financial reporting at every meeting. An annual look at the risk register, insurance, and the compliance calendar. Conflicts declared and recorded when they arise, with the interested director recused where required.

None of this requires a large company. It requires a corporate secretary function that actually runs the cycle: notices out on time, resolutions drafted, minute book current, filings made. Most private companies do not lack governance because they rejected it; they lack it because nobody owns the calendar.

When to add an independent director

Usually at one of three moments: when an investor requires it, when the founders need a tiebreaker or an outside view in the room, or when the business reaches a scale where the board's decisions carry consequences the founders should not be making alone. The value of the seat depends entirely on the person in it, and specifically on whether they will disagree with management in a room where disagreement is uncomfortable.

This article is general information, not legal advice, and does not create a solicitor-client relationship. The law changes and its application depends on your circumstances. Speak to a lawyer about your situation.