As in other parts of the world, corporate governance in Canada has received greater scrutiny and been the subject of many developments in the past 15 years. It has evolved through a broad public dialog precipitated by studies prepared on behalf of the Canadian Securities Regulators, the Toronto Stock Exchange and other interested groups.
Corporate directors and officers in Canada are subject to general fiduciary duties established by corporate law. The growth of the modern corporation has necessitated the delegation of many director responsibilities to professional managers. While corporate law fiduciary duty obligations permit delegation of certain matters, they do not prescribe or focus on the process for proper supervision where substantial delegation occurs. Modern corporate governance has centered on the development of structures, processes and controls to enhance the operation of a board that supervises professional management of a complex organization.
The governance landscape in Canada comprises minimum legal requirements contained in securities legislation in addition to underlying corporate law fiduciary duties. Securities regulators have also adopted policies that identify and require discussion of governance in areas where best practices are emerging and changing. Institutional shareholders have funded professional commentators that seek to advance best practices for professional directors and improve the transparency of the functioning of the board and the management of the corporation. Their involvement facilitates shareholder evaluation of a board and its management and enhances accountability and shareholder democracy. Serving as a director now requires orientation, education and ongoing learning.
Fiduciary Duties Under Corporate Law
Under Canadian corporate law, directors and officers are required to act honestly and in good faith with a view to the best interests of the corporation. Directors must act prudently, on a reasonably informed basis, and be free from conflict in discharging their duties. Canadian courts recognize that they are ill-suited to second guessing the application of business expertise where an appropriate degree of prudence and diligence was brought to bear on a decision, and the decision was free from any conflict of interest. The courts will defer to a reasonable decision in these circumstances: this is known as the business judgment rule. However, the courts will readily question decisions where adequate attention was not paid or a conflict of interest existed, and will take action accordingly.
The fiduciary duties that directors owe to the corporation are not owed to the corporation’s shareholders or creditors. A board must consider these stakeholders’ interests. If a board acts in a manner that is unfair or prejudicial to these interests, an oppression remedy that exists under Canadian corporate law provides a broad right of action.
Governance Rules in Securities Law
Most recent legislative developments around corporate governance in Canada have been implemented through the securities regulatory process. While securities laws are a matter of provincial jurisdiction in Canada, a high degree of uniformity has been achieved between the provinces through the adoption of national instruments or substantially equivalent local legislation. Canadian securities regulators have also adopted policies providing a number of guidelines and recommendations, which are not law, to all public issuers. Securities rules require issuers to disclose their position concerning the items covered in these guidelines. This obligation enables ongoing public dialogue and the evolution of best governance practices and, as a practical matter, imposes rules on companies that do not want to suffer public embarrassment.
The Canadian securities regulators have made the following governance recommendations:
1. Independence: The board should have a majority of independent directors.
2. Independent Chair or Lead Director: The chair of the board should be independent. Where this is not appropriate, an independent director should be appointed to act as lead director. In either case, the director should act as an effective leader of the board and ensure that the board’s agenda will enable it to successfully carry out its duties.
3. Meetings in camera: Independent directors should regularly hold scheduled meetings in which non-independent directors and members of management are not in attendance.
4. Mandates: The board should adopt a written mandate in which it explicitly acknowledges responsibility for the stewardship of the issuer including the responsibility for:
(a) satisfying itself concerning the integrity of the senior officers;
(b) adopting a strategic plan on at least an annual basis that takes into account the opportunities and risks in the business;
(c) identifying the principal risks of the issuer’s business and ensuring implementation of appropriate systems to manage these risks;
(d) succession planning;
(e) adopting a communication policy for the issuer;
(f) the issuer’s internal control and management information systems; and
(g) developing the issuer’s approach to corporate governance, including developing a set of corporate governance principles and guidelines that are specifically applicable to the issuer.
The mandate should also provide measures for receiving shareholder or stakeholder feedback and the expectations and responsibilities of the directors, including board meeting attendance and material review.
5. Position Descriptions: The board should develop clear positions for the chair of the board and the chair of each board committee. As well, the board, together with the CEO, should develop a clear position description for the CEO and management’s responsibilities.
6. Orientation and Continuing Education: The board should ensure that all new directors receive comprehensive orientation so that they fully understand the role of the board and its committees, and how each individual is expected to make a contribution. Continuing education for all directors should also be provided.
7. Code of Business Conduct and Ethics: Boards should adopt a written code of business conduct which would be applicable to directors, officers and employees, and should constitute written standards that are reasonably designed to promote integrity and deter wrongdoing. The code should cover:
(a) conflicts of interests;
(b) protection and proper use of corporate assets and opportunities;
(c) confidentiality of corporate information;
(d) fair dealing with stakeholders; and
(e) compliance with laws and the reporting of any illegal or unethical behavior.
8. Director Nominations: The board should have a nominating committee composed entirely of independent directors. The committee should have a written charter that clearly establishes the purpose, responsibilities, member qualifications and manner of reporting to the board as a whole. The nominating committee shall consider what competencies and skills the board as a whole should possess, what competencies and skills existing directors possess, and identify any particular needs.
9. Board Size: The board should also consider the appropriate size of the board to facilitate effective decision making.
10. Compensation: A compensation committee composed of independent directors is also recommended. The committee should have a written charter that establishes its purpose, responsibilities, member qualifications and manner of reporting to the board.
11. Assessment: The board, its committees and each individual director should regularly be assessed regarding his, her or its effectiveness and contribution. Such assessment should consider individual director performance as well as the board as a whole (or committee) in relation to its mandate and charter.
Other Corporate Governance Influences
Corporate governance in Canada is strongly influenced by institutional shareholders and institutionally funded commentators and organizations. Various individuals and organizations have devoted significant time to corporate governance review and the funding of non-profit institutions with a full-time focus on governance. These commentators draw attention to lapses and constantly assess and suggest improvements to current practices. The views of these commentators are important, particularly where the votes of their institutional investor clients are required. These investors tend to follow adviser recommendations on election of directors, say on pay and equity compensation pool matters.
Corporate governance in Canada continues to evolve rapidly as new issues and topics arise. Issuers accessing Canadian markets require a full appreciation of the current expected state of practice if they are to be effective participants in Canadian capital markets.
Bennett Jones’ Corporate Governance and Director Protection Group
The Bennett Jones Corporate Governance and Director Protection Group understands the challenges and risks inherent in board membership. Our Group works with our clients to address these ongoing challenges in ways that meet the expectations of our clients’ stakeholders and improve our clients’ businesses. We draw on the varied experiences and expertise of a team of professionals that includes senior corporate and securities law practitioners, current and former directors, in-house counsel, and senior-level government officials, judges and regulators. We give directors and senior management practical guidance in a rapidly changing governance climate.