Choosing a Board of Directors or Board of Advisors For Your Business

Selecting a board of directors or a board of advisors is an important decision and should be given careful consideration. An early decision that company stakeholders will often make, to achieve their collective goals, is to recruit directors or advisors with a strong and complementary skill set (to fill operational or experiential gaps within the company).

Canadian business laws pertaining to director liability makes this offer to join a board of directors less enticing than you might think as this article will point out, so instead, many potential directors will instead agree to join a board of advisors instead. A board of advisors is fairly straightforward to set up and consists of a group of key people who will advise and counsel the company’s executives on business decisions.

Advisors and directors are treated differently for liability purposes

Generally, under corporate law, directors have legal liability and a fiduciary duty to the corporation and advisors do not. For example, directors may be responsible for employee lost wages in the event of bankruptcy, and other potential liabilities exist, such as, environmental liabilities (mostly, from toxic spills).

Directors must protect the corporation by law

Under Canadian business law, the board of directors is required to supervise and manage the affairs of the corporation. The directors must conduct their supervisory and managerial roles in good faith. Directors have a duty of care, duty of loyalty, duty of obedience and fiduciary duties. Breach of any of these duties may result in a finding of liability for an act or omission.

Compensation may vary for directors/advisors

Whether a company has a board of directors or a board of advisors, compensation is flexible. A company may choose to compensate either a director or an advisor in cash, with options, a combination of cash and options, cash only, or the company may even choose not to compensate such directors. This is not a critical factor for choosing a board of advisors over a board of directors or vice versa.

Directors make decisions for the business

Unless restricted by a unanimous shareholders’ agreement, the directors have powers given to them under the Company’s articles of incorporation, applicable corporate statute (such as the Ontario Business Corporation Act or the Canada Business Corporation Act), and the company’s by-laws, as applicable. For example, Directors may have the power to approve share issuances, indebtedness, create a security interest in any of the property of the corporation among other decisions. Because directors have significant decision-making powers, appointing directors of a corporation should not be considered lightly.

As noted above, a company may restrict a director’s decision-making power via a unanimous shareholders’ agreement, and under this arrangement, the shareholders play a more active role in managing the company’s affairs. This is a common arrangement in a small private company (for example, in a start-up company). Because of the greater accountability given to shareholders in these circumstances, there is some distance created between the board of directors and the company, and risk of liability begins to shift away from directors and towards shareholders.

Director and Officer Liability Insurance

Directors (and officers, especially in a company in which shareholders are taking an active management role) may be exposed to risks as noted above, and because of this, many directors will purchase directors and officers insurance to protect from liability that may arise should some legal action be brought against them in their capacity to act as directors of the company.

In conclusion, there are many factors which must be carefully weighed when structuring and selecting directors or advisers to guide the growth of a company.

Written by Rajah. Rajah Lehal is Founder and CEO of Rajah is a legal technologist and technology lawyer who is, together with the Clausehound team, capturing and sharing lawyer expertise, building deal negotiation libraries, teaching negotiation in classrooms, and automating negotiation with software.