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Companies need directors to guide them in decision-making, strategy and ensuring compliance with legal obligations. Directors are responsible for the governance of a company which is fundamental to ongoing operations. While New Zealand law does not impose a maximum number of directors a company can appoint, it does mandate a minimum. This article discusses the various factors, including legal provisions and practical considerations, which dictate the structure and scale of a company’s board of directors.
What is a Company Board of Directors?
The company board of directors bear substantial legal and governance duties and is deeply invested in ensuring the long-term success of a business and sustained operation. They provide strategic guidance to management in regard to the supervision, direction and operation of business activities. The board also hold legal responsibility for making decisions that serve the company’s best interests. Typically the company’s shareholders appoint the directors.
There are two types of directors: executive and non-executive directors.
|Executive directors work in the business. They are typically key management (such as the CEO).
|Non-executive directors do not work within the business. They typically have a particular skill set and bring external experience and objectivity to the board table. Non-executive directors can be categorised as either:
1. non-independent: the director is also a shareholder in the company; or
2. independent: the director has no other affiliations or ties with the business that might impact their judgment.
What is the Minimum Threshold?
In New Zealand, the Companies Act provides the primary legal framework that governs your company’s structure, operations and functions. The Act states that a company must have at least one director. The company must also have at least one director who:
- resides in New Zealand; or
- resides in Australia and is also a director of an Australian company.
While beyond the scope of this article, it is worth noting that listed companies have different (more stringent) requirements regarding the composition of their board.Continue reading this article below the form
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What is the Maximum Threshold?
There is no legislated maximum number of directors. This allows companies to be flexible and compose a board appropriate to specific operational needs, industry demands and strategic objectives. While not mandated under law, the company constitution or shareholders agreement might impose a minimum and maximum number of directors.
The number of directors suitable for your company will depend on various factors, including:
- the stage of the business;
- number and type of shareholders;
- industry; and
- particular operational and strategic needs.
There is no “one size fits all” in terms of deciding the number of directors required on a board. Regardless, companies often look to have an odd number of directors to avoid stalemates in decision-making. However, note there are other mechanisms that a company can adopt to manage this when working with an even number of directors.
Building your Board of Directors
While there are no restrictions on the maximum number of directors a company can have, you should always act with prudence and consider several aspects when determining an appropriate board size. The board of directors should be diverse, specifically the board members’ experiences and skills. This will better guide your company in the desired strategic direction.
When forming a board of directors, you should identify the types of expertise required for company success and select directors accordingly. The chosen directors should complement each other’s skills. Make sure to assemble a complete governance team and ensure appropriate rotation requirements based on the company’s strategic direction.
Download our free guide to understand your corporate governance responsibilities.
There is no maximum number of directors you can appoint to your board, but there are minimum requirements that you need to meet. Typically, you should look to have an odd number of directors to prevent deadlocks when voting or making decisions. Determining the optimal total number of your board composition depends on:
- the current stage of the company;
- efficiency and functionality;
- industry and company size; and
- practical implications.
If you need assistance regarding your board composition, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.
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