Banka: Understanding a board director’s role with a company

A company doing business for profit is incorporated under the B.C. Company Act.

A company doing business for profit is incorporated under the B.C. Company Act.

According to this legislation, a company needs to have at least one director, unless it is a public company in which case it needs three.

If the company is a not-for-profit enterprise, it is incorporated under the provincial Society Act.

Although five persons are required to form a society, the society only needs three directors to operate.

If the number of directors fall below three for more than six months, then those two or less directors become personally liable for every debt of the society incurred after those initial six months and for as long as the number of directors remains less than the required three.

The rules for directors under the Society Act have been changed recently to resemble the rules and requirements under the Company Act.

For example, if you are a director of a profit orientated operation, you may be required to purchase shares in that company.

It is thought that by having a financial stake in the company, you may then be more likely to carry out your duties of managing the company finances.

This option exists in the Society Act. Paragraph 30 states: “A society may require a director or officer to give the security it considers sufficient for the faithful discharge of duties.”

On the other hand paragraph 27 in the Society’s Act also requires that: “A director of a society who is, directly or indirectly, interested in a proposed contract or transaction with the society must disclose fully and promptly the nature and extent of the interest to each of the other directors.”

What seems to happen in small not-for-profit boards is that one or two persons are credited with the creation of the society and because of their significant investment into the affairs of the society, financial or otherwise, are not directors on the board because of the possible conflict of interest that could be perceived.

This may also happen in an owner managed profit based company that has a board.

The reality with these boards is that those persons with the significant investment also have significant influence on the board members and in a lot of cases recommend board members who will support or promote their interests.

If the board does happen to make a decision that they do not agree with, they can refuse to follow it and then the board is forced to make the decision that will appease these “influential outsider(s)” or owner managers.

So then the question is what is the purpose of the board?  How is the risk to the board members increased?

The most obvious risk is the risk that due to the shortsightedness of the  influential outsider(s), the society/company becomes insolvent and the board members may become liable for the debts of the society/company personally.

If there are employees in the society/company, the employees may be willing to work without a salary, but then the board members could become personally liable for the payment of these unpaid wages.

The board members also become personally liable for the statutory deductions required for these wages.

Some of the duties of directors are to:

1) Provide strategic guidance for the organization to ensure that the organization has direction that will help it to face the future opportunities and challenges and that any projects under consideration fall within the confines of the organization’s constitution.

2) Ensure that the organization has competent, trained and committed senior management.

3) Ensure that sound financial practices and policies are followed that would include the selection of the annual auditor and the approval of the financial statements.

4) Ensure that the needs of all stakeholders are met, not just a particular group or director that is the loudest.

5) Ensure that the organization is complying with its legal obligations such as government reporting.

6) Ensure that each board member has a defined duty and responsibility.

If a person is a director of any company, it would be prudent for the company to purchase insurance for the benefit of the director against any personal liability that may be incurred.

It would also be a good idea for each director to be thoroughly familiar with the applicable Company Act and Society Act as well as the constitution and by-laws that were set up upon incorporation.

It would be the duty of the board to provide all this documentation to the new directors.

Gabriele Banka is a Certified General Accountant and the owner of Banka & Company Inc.

250-768-4528

info@bankaco.com

 

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