Directors’ Responsibilities In Canada
Directors’Responsibilitiesin CanadaOctober 2014Osler, Hoskin & Harcourt llpInstitute of Corporate Directors
In Memory of Purdy Crawford1931 – 2014We remember Purdy for his extraordinary leadershipand the remarkable impact he had on those hementored and worked with over his extensive career.We are honoured to have counted Purdy as a friendand colleague for so many years, and we will greatlymiss his wisdom, generosity and pursuit of excellencein all things.
Directors’Responsibilitiesin CanadaOctober 2014ForewordSixth EditionA Retrospective and Prospective Look at theWorld of Corporate Governance: Insights fromThree Institute of Corporate Directors Fellows.EditorJustin DharamdialEditorial BoardNoralee BradleyJeremy FraibergMark GelowitzClay HornerRob LandoAndrew MacDougallShelley ObalFrank TurnerCraig WrightRobert Yalden“ The more things change, the more they stay the same.”This old adage applies to many areas of business,and corporate governance is no exception. The spateof regulations that followed the global financial crisishas put corporate directors squarely in the cross-hairs.Beyond heightening the levels of accountabilityexpected of boards, these regulations introducedthe potential for increased director liability. However,today’s definition of “good corporate governance”continues to draw on meaningful lessons learned fromthe principles that have long guided Canadian boardrooms.In recognition of our twenty-fifth year of publishingOsler’s guide to Directors’ Responsibilities in Canada,produced in collaboration with the Institute of CorporateDirectors (ICD), we spoke with three legends that haveshaped governance best practices and principles in thiscountry – Purdy Crawford, Peter Dey and Brian Levitt –and captured the Osler alumni and ICD fellows’ thoughtson the evolution of corporate directorship.Osler, Hoskin & Harcourt llpInstitute of Corporate Directors
Directors’ Responsibilities in CanadaPurdy Crawford’s name is synonymous withCanadian business and law. The “dean emeritus ofCanada’s corporate bar,” he was a mentor to severalof Canada’s brightest economic thinkers and isrecognized for his contribution to changing the waybusiness is done in the boardroom, particularly inopening the door for women.Peter Dey, the founding author of Directors’Responsibilities in Canada, chaired the TorontoStock Exchange Committee on CorporateGovernance in Canada that released the seminalDey Report, which established governancestandards for Canadian companies. In addition toa successful career as an M&A advisor, securitiesregulator and investment banker, Peter remains anactive corporate director and continues to drivethe reform process, including the criticalimportance of diversity.Brian Levitt is a Vice-Chair of Osler, having hadsuccessful careers as a lawyer advising on M&Aand corporate governance matters and as a CEOof what was at the time one of Canada’s largestcompanies as measured by market capitalization.For more than 25 years, he has served as a directorof various public companies, and currently servesas a board chair, having chaired another boardprior to that.The Evolution of Corporate GovernanceAccording to all three professionals, much haschanged in the world of corporate governance inrecent years.“Corporate directorship is much less of a ‘boysclub’ than it was in the past,” Purdy says. “There isgreater recognition of actual or potential conflictsof interest and the need for good, transparentprocesses to lead to proper outcomes. There is alsoa greater emphasis on professionalism, training,mentorship and meritocracy.”Peter concurs. “I think the evolution that has takenplace is the significant increase in the propositionof institutional investors in our capital markets,with a broad range of investment time horizonsimposing an equally broad range of pressures onboards of directors.”Osler, Hoskin & Harcourt llp“The heightened focus on the role andresponsibility of directors in delivering corporateperformance began with the Enron scandal andthe passage of the Sarbanes Oxley legislation in theUnited States, and has been intensified by theemergence of activist investors and the impactof the Great Recession on financial markets,” Brianadds. “As economies recover, directors can’t losetrack of that business. The marker of goodcorporate governance is not having good processes;it’s having a healthy business. Directors cannotbe expected to guarantee a perfect outcome. Inbusiness, you need to take risks because, withoutrisk, there would be no reward. This may increasethe risk of judgments being contested, but directorswho make business judgments based on a soundfactual foundation have nothing to fear.”Paving the Way for Good CorporateGovernanceAs much as corporate governance in Canada hasevolved in recent years, the fundamental principlesremain the same.“There has always been a recognition of theinherent value of ethical behaviour on behalf of allstakeholders,” Purdy asserts. “But many of thesefactors have become formalized in law and policyguidelines. However, their essential value hasalways been around. It has simply now becomefashionable to recognize it.”“There have always been good boards that providevalue and effective management oversight,” Brianagrees. “While the process that guides thisbehaviour has risen in importance over the pastfew years, the substance remains as important asit ever was.”According to Peter, these underlying behavioursunderpin the ongoing relevance of our earlycorporate governance guidelines. “Governance isjust good common sense,” he says. “When you puta group of people together, it’s about the steps theytake to ensure they make sensible decisions.”Institute of Corporate Directors
Directors’ Responsibilities in CanadaAdapting Guidelines for Today’s MarketsWhile Purdy, Peter and Brian agree that many ofthe early corporate governance principles remainrelevant, they would consider the addition of afew additional guidelines.“I think boards should focus on the sustainabilityof the enterprise over the longer term, ratherthan being too responsive to a component of theinvestment community whose compensationdepends on how their investments prosper quarterto-quarter,” Peter says.“I would also emphasize leadership’s role inestablishing the ethical culture of an organization,”he continues. “And I might put in a guideline toemphasize the importance of diversity – not justby gender, but by thought process, experienceand knowledge.”Enhancing Shareholder Value ThroughGovernance Best PracticesStrong corporate governance has long focused onthe imperative of enhancing shareholder value.Achieving this objective, however, requires anunderstanding of how board decisions translateinto business results.“If you get the right people on the board andin management, with the right mix of skills andexperience, and everyone understands their role,you maximize the likelihood that the criticaldecisions that a company has to make, such asthose regarding capital allocation and leadership,will enhance its value for all stakeholders,”Brian explains.“Management is typically focused on today’sissues and a board can often fall into the trap ofjust looking at what has happened, rather thanat helping management focus on looking forward,”he continues. “The board does this by makingforward-looking strategy part of the discussionat the boardroom table and by puttingmanagement incentives in place to encouragethis forward thinking.”What Constitutes Good Corporate GovernanceAlthough Canada is often cited for its world-classcorporate governance practices, directors andleading experts in this space continue tocontemplate strategies for improving performance.“The practice in Canada of separating the CEOposition from the Chair of the Board position,rather than combining these roles in one person,has in many ways set the tone for a more principlerich approach to governance,” Purdy notes.“This approach is inherently more balanced andadaptable to evolving governance issues than arules-based, ticking-the-box approach.”“For my part, I think it’s important that directorsare either owners or think like owners,” Peter says.“Directors should take their compensation, if possible,in equity and hopefully develop a meaningfulinvestment over time, which encourages them tothink like owners and should produce betterdecisions and better results.”“Corporate directors must always focus onenhancing shareholder value, but determining whatthis means is not simple,” adds Purdy. “Actions thathighlight ethical behaviour, contributions to societyand generally being a good corporate citizen canoften be seen as appropriate to enhancing longterm shareholder value.”Brian sums up by asserting that good governancerequires a combination of two things: a clear andmutual understanding of who is accountable forwhat, and a relationship of trust and confidencebetween management and the board. “The linchpinfor both these elements is the CEO’s attitudetowards the board,” he says. “If the CEO wantsfeedback and the benefit of the board’s advice, andrespects and trusts the board, then you get apositive mutual feedback loop that encouragesboard members to rise to the challenge.”Osler, Hoskin & Harcourt llpInstitute of Corporate Directors
Directors’ Responsibilities in CanadaPlotting a Course for the FutureThere are, of course, considerably more challengesfor today’s directors than in the past, which iswhy Osler’s guide to Directors’ Responsibilities inCanada, produced in collaboration with the ICD,bears ongoing updating and review. Beyondcovering the duties of directors, the role ofshareholders and the shifting regulatory mandatesto which boards must adhere, this guide isdesigned to help directors discharge their duties ina way that benefits all corporate stakeholders whilesimultaneously contributing to effective andtransparent operation of the capital markets. Webelieve you will continue to find it a valuable toolin fulfilling your responsibilities amid today’sconstantly evolving business trends, market shiftsand technological innovations.Osler, Hoskin & Harcourt llpInstitute of Corporate Directors
Directors’ Responsibilities in CanadaMessage from the President and CEO of theInstitute of Corporate DirectorsIn recent times, rarely does a day go by without some story in themedia about corporate governance. Not only is the media focused oncorporate governance, but so too are society, stakeholders, regulatorsand politicians.In an increasingly transparent, competitive and challenging globalenvironment, demands and expectations for corporate and organizationalperformance, and director effectiveness and performance have beenelevated. As stewards of their corporations and organizations, directorsare expected, among other things, to engage in the oversight of strategy,talent management, executive compensation, risk management, and theappointment and continuing evaluation of the CEO. High performanceboards add value in all of these areas.But to whom do directors owe their duty? The seminal decision of theSupreme Court of Canada in BCE Inc. makes it clear that directors owetheir duty to the corporation. In discharging this duty, directors arerequired to have fair regard to the interests of various stakeholders.Furthermore, the BCE Inc. decision makes it clear that directors shouldfocus on the creation of value over the longer term. In doing so, directorswill be challenged to overcome pressures brought to bear by proponentsof short-termism and short-term thinking.How should directors balance short-term pressures with the need toconduct business in a socially responsible manner, and create highperforming and sustainable organizations? Ultimately, the key will lie withthe exercise of business judgement by directors. But in exercising thisbusiness judgement, directors must be familiar with the legal frameworkwithin which they operate.As the “go-to” community for directors in Canada, the ICD is committedto the sharing of wisdom, information and tools to enable directors tobuild better boards and ultimately, better businesses. We are delightedto collaborate with Osler in the publication of this guide and hope it willcontinue to be a valuable reference for the director community inunderstanding and discharging its legal obligations.Yours truly,Stan MagidsonOsler, Hoskin & Harcourt llpInstitute of Corporate Directors
Directors’ Responsibilities in CanadaTable of ContentsIntroduction11. Membership of the Board26Duties of Directors4(a) Number of Directors264(b) The Independent Director26(a) Manage versus Monitor5(c) Chair of the Board28(b) Mandate of the Board5(d) Qualification292. Standards of Performance7(e) Election and Term30(a) Fiduciary Duty8(f) Remuneration31(b) Duty of Care9(g) Vacancies31(h) Resignation and Removal31I.1. Function of the Board of Directors(c) Business Judgment3. To Whom are Directors Accountable?1113III. Corporate Governance252. Board Meetings32(a) Interests of the Shareholders13(a) Frequency32(b) Interests of Other Stakeholders13(b) N otice of Meeting, Attendance andWritten Resolutions32(c) Location and Telephone Meetings33(d) Quorum33(e) Voting33(f) Minutes343. Delegation344. Confidential Information14(a) Corporate Opportunity14(b) D uty of Confidence, Insider Tradingand Tipping145. Reliance on Management, FinancialStatements and Advisors14(a) Reliance on Management14(a) Board Committees35(b) Reliance on Financial Statements15(b) Audit Committee35(c) Reliance on Advisors15(c) Compensation Committee376. Reasonable Diligence16(d) Nominating Committee387. Taking Action Against the Directors16(e) Special Committees38(a) Oppression164. Directors’ Conflict of Interest39(b) Derivative Action18(a) When Does a Conflict Arise?39(c) Compliance Orders18(b) Voting and Abstaining from Voting405. Information ManagementII.Role of Shareholders201. Shareholder Meetings212. Shareholder Ability to Change the Board223. Dissent Rights224. Shareholder Approval Under SecuritiesLaws or Stock Exchange Rules23Osler, Hoskin & Harcourt llp40(a) Information Provided to Directors40(b) Financial Reports41(c) Timely Disclosure426. Securities Law and Stock ExchangeRequirements42(a) Stock Exchanges42(b) Role of the Securities Regulator42Institute of Corporate Directors
Directors’ Responsibilities in CanadaIV. Directors in Action1. Financing455. Environmental Matters64(a) Ongoing Compliance65(b) Specific Occurrences66(c) Acquiring an Interest in Real Estate67(d) Corporate Disclosure676. Facing Financial Difficulties67(a) The Role of the Board68(b) To Whom Directors Owe Their Duty68(c) Personal Liability69Statutory Liabilities7245(a) Issuing Debt45(b) Issuing Shares46(c) Accessing the Capital Markets47(i) Private Placements47(ii) Public Capital48(iii) P roceeding with a Public Financing– The Short Form Prospectus49(iv) Proceeding with a Public Financing– The Long Form Prospectus50(d) Dividends51(i) Discretion to Declare Dividends51(ii) Declaring the Dividend52(a) Types of Payment7352(b) Corporate Solvency Tests74(a) Timely Disclosure52(c) Defence and Penalty75(b) Announcing a Transaction53(c) Financial Statements55(a) Directors as Insiders76(d) Annual Information Form (AIF)55(b) Insider Trading Reports76(e) M anagement’s Discussion andAnalysis (MD&A)(c) Use of Inside Information7755(d) Defences77(f) Statutory Civil Liability in theSecondary Market56(e) When is Information Disclosed78(g) Executive Compensation583. Liability for Offences Under theCorporate Statutes78(h) Proxy Rules584. Environmental Legislation79(i) Insider Reporting and Trading59(a) Regulatory Offences7959(i) Nature of the Offences79(ii) Due Diligence Defence79(iii) Regulatory Penalties80(b) Criminal Code Offences80(c) Orders80(d) Statutory Liability for Damages802. Public Company Disclosure Obligations3. Dealing With a Controlling Shareholder(a) O ngoing Relationship with theControlling Shareholder59(b) T ransactions Between the Corporationand the Controlling Shareholder60(c) The Controlling Shareholder’sParticipation on the Subsidiary’s Boardof Directors4. Takeover BidsOsler, Hoskin & Harcourt llp61V.1. Impairment of Capital and CorporateSolvency Tests2. Insider Trading5. Pension Matters61Institute of Corporate Directors737681
Directors’ Responsibilities in Canada6. Employee-Related Matters82(a) Wages, Vacation Pay and Termination Pay 82(b) Source Deductions83(c) Occupational Health and Safety Matters837. Tax Liabilities84(a) Source Deductions and Other Remittances 84(b) Offences of the Corporation85(c) Clearance Certificates85(d) GST/HST858. Foreign Corrupt PracticesVI. Managing the Risk1. Limiting the Risk858787(a) Discharge of Responsibilities88(b) Unanimous Shareholder Agreements89(c) Trust Accounts, Letters of Credit andDirectors’ Charge89(d) Resignation902. Indemnities90(a) Limitations90(b) Tax Treatment91(c) Mandatory Indemnity91(d) Indemnities Contained in By-Laws92(e) Contractual Indemnities923. Insurance93(a) Acquiring Insurance93(b) Terms of the Policy944. When an Action is BroughtVII. ConclusionVIII. Directors’ Duties in PracticeOsler, Hoskin & Harcourt llp9698101Institute of Corporate Directors
1Directors’ Responsibilities in CanadaIntroductionDirectors of corporations have good reason to be concerned about theirresponsibilities and potential liabilities. Society is very interested in propercorporate governance and, in particular, the accountability of individualswho direct corporate behaviour. There is complex securities regulation inthe corporate governance area in Canada and the United States. Courts,regulators, legislators and shareholders closely scrutinize the way in whichdirectors discharge their responsibilities.Directors respond by closely monitoring theactivities of the corporation they serve, by criticallyevaluating their exposure to liability as a result ofthe corporation’s activities and financial condition,and by recognizing that, in many cases, they canmanage the risks if they fully understand the natureof their obligations so that they can properlydischarge them.This guide outlines the responsibilities and liabilitiesimposed on directors of Canadian corporations.While the guide focuses on public companies,private company directors have essentially thesame responsibilities and liabilities as their publiccompany counterparts except for those imposedby securities laws or stock exchange requirements.The guide deals with the issues confrontingdirectors in the following way: Part I sets out corporate and common law dutiesof directors and describes the general principlesapplicable to the discharge of those duties. It alsooutlines the manner in which the corporation,shareholders and third parties may enforce thoseduties. Part II describes the role of shareholders. Part III addresses corporate governance as itrelates to the process by which boards ofdirectors discharge their responsibilities. Part IV discusses a number of decisions thatdirectors typically face and highlights the issueswhich should be of particular concern to directorsmaking such decisions.Osler, Hoskin & Harcourt llp Part V describes some of the additional statutoryduties imposed on directors, the penaltiesassociated with a breach of those duties and thedefences available to directors. Part VI reviews the ways that directors canreduce their risk of personal liability, in particularthrough indemnities and insurance.Reference is made primarily to corporationsgoverned by the Canada Business Corporations Act(the CBCA) and the duties and liabilities imposedon directors of those corporations. While provincialbusiness corporations legislation is, in most cases,substantially similar to the CBCA, there aredifferences from one statute to the next in theprovisions dealing with directors. Some significantdifferences are highlighted, but directors shouldconsult counsel to ensure they are aware of all ofthe responsibilities imposed on them by theircorporation’s governing statute. Corporations thatcarry on busine
Osler, Hoskin & Harcourt llp Institute of Corporate Directors Directors Responsibilities in Canada Introduction 1 I. Duties of Directors 4 1. Function of the Board of Directors 4 (a) Manage versus Monitor 5 (b) Mandate of the Board 5 2. Standards of Performance 7 (a) Fiduciary Duty 8 (b) Duty of Care 9 (c) Business Judgment 11
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