Good corporate governance

5 T H MINI LLB FOR ABORIGINAL LEADERSHIP COURSE

MARCH 15, 2016

CHRIS HYLTON&

CHARLENE BRUNO

Good Corporate Governance and Duties of Directors

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Disclaimer

The information presented to you today is considered to be general best practices. This is not intended to provide expert counsel or

advice.

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Speaker Bios

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Learning objectives

Understanding general rules around corporate governance

Understanding the duties of directors

Understanding the impact of strong electoral policies and guidelines for elected officials

5Image courtesy of www.healthcaregovernancereview.org

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Corporate Governance

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Key elements of good corporate governance

Corporate framework

Quality decision making

Policy development

Duty of care including fiduciary duty

Defense and protection

Standard of review

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Corporate framework based on critical functions

Canada Business Corporation Act (CBCA)Articles of incorporation

Name

Authorized share capital

Restrictions on share transfers

Number of directors

Other matters such as restrictions on business

Source: Haskayne School of Business - Executive Education

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Corporate framework based on critical functions Bylaws

• Officers and their roles

• Director meetings

• Shareholder meetings

• Indemnification

• Signing authorities


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Internal authorityCorporation

Capacity and powers of a natural person

Shareholders Elect directors annually to represent their interests Appoint external auditor on an annual basis Approve fundamental changes


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Internal authority (cont’d)Directors

Elected by Shareholders Manage, or supervise management of, business and

corporation affairs Delegates, subject to stated limits Minimum of 3 in a public company Must meet qualifications Independence requirements


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Internal authority (cont’d)Audit Committee

Appointed by Board Required in a public corporation Minimum of three Independence requirements


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Internal authority (cont’d)

Officers Designated and

appointed by Directors Delegated responsibility

from the Board Day-to-day management

of the corporation


Auditor Appointed by

Shareholders May be dispensed with

in a non-public corporation

Provides audit opinion on the corporation’s financial statements


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Flexibility The framework must be able to adapt to the needs of

the corporation

Shareholder protection through the roles and responsibilities of Directors and officers Fiduciary duty Duty of care Remedies for Shareholders Oppression remedy Derivative action


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Quality Decision Making

One of the cornerstones of good corporate governance is consistent and quality decision making.

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Underlying quality of materials and information Effective systems, controls, and internal reporting Consider reliability of information

Use of and reliance on experts when appropriate

Consideration of viable alternatives

Awareness around conflicts of interest

Decision making done by independent majoritySource: Haskayne School of Business - Executive Education

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Effective use of committees

Avoid making decisions under pressure whenever possible

Allocating sufficient time to decisions relative to their importance

Gathering reliable information and asking questions as required


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Policy Developme

nt

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Board governance policy development

Directors’ and Officers Liability InsuranceDirector obligation to manage, or supervise

the management of, the business and affairs of a corporation (CBCA, section 102(1))

Fiduciary duty to “act honestly and in good faith with a view to the best interest of the corporation” (CBCA, section 2 (1)(a)) Disclosure Confidentiality Conflict of interest


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Duty of care requires that directors and officers must exercise a standard of care to avoid injury to the corporation “Exercise the care, diligence and skill that a

reasonably prudent person would exercise in comparable circumstances.” (CBCA, section 122(1)(b))


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Business Judgement Rule decrees that Canadian courts will not second guess business decisions made: Independently, without conflict of interest In good faith On a reasonably informed basis Based on information available at the time, where the

decision falls within a range of reasonable options available at the time

Source: Haskayne School of Business – Executive Education

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Duty of care

Corporations must exercise the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances This applies to both directors and officers This is based on an objective standard: Look outside in

rather than inside out


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Duty of care

Skill level required Must employ skill and knowledge they possess Higher standard of care expected of those that

possess greater knowledge or skill Must be diligent in attending to the operations of the

corporation For example: attend meetings regularly, become

knowledgeable about the corporation’s business


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Fiduciary Duty

Fiduciary duty includes adherence to guidelines around confidentiality and disclosure

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Fiduciary duty

Confidentiality Strict adherence to maintaining confidentiality of

information

Disclosure Information affecting the corporation in a vital aspect

of its business


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Fiduciary duty

When joining a board, members should consider how connections may impact board duties

When making decisions, members must determine if All Stakeholder interests have been considered Decision is in the long-term best interest of the

corporation Information should remain confidential and

never used for personal gain or other purposes

Material conflicts of interest should be disclosed

Members should be required to disclose potential conflicts of interest on an annual basis


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Due diligence defence Indemnification provisions

Directors and officers should be aware of exposure to personal liabilities

Must be a clear understanding of what constitutes appropriate diligence

Corporate statutes Corporate bylawsContractual –

Federal Agreements


Defense and protection

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Risks to Directors and Officers

Criminal liability Fraud, personal profit Employee injury or death

Tort liability Negligence Breach of fiduciary duty or duty of care Misrepresentation

Regulatory Workers’ Compensation


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Risks to Directors and Officers

Statutory liability Statutes impose Personal Liability on Directors and

Officers Corporation MUST operate within a wide range of laws

Corporate Employment Taxation Product liability Occupational Health and Safety Environmental Securities Financial Reporting Bankruptcy/Insolvency Competition


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Director and Officer liability insurance

D & O liability insurance protects Officers and Directors against personal liabilities incurred while carrying out duties and functions in directing the affairs of the corporation Keeping Shareholders informed Raising capital (securing debt) Contract negotiations Regulatory, financial, and disclosure compliance Key employee recruitment and termination


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Policies should cover Directors Officers Employees (generally as co-defendants) Spouses (covered by policy as protection for personal

assets) Trustees


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When obtaining D & O liability insurance, corporations should considerAbility of company to fund deductibleOther insurances purchasedUnusual business structures covered

Income trusts, partnerships, joint ventures Cancellation policySignatures required


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Conduct exclusions Payment of defence costs for allegations of

misconductCoverage for statutory liabilitiesDirector share limits with

Entity Employment practices Fiduciary/Pension/Benefits

Opportunity for Directors to consult on the scope and structure of the policy


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Standard of review for corporate governance

Toolkit to assist reliance on the business judgement rule Appropriate time spent on the decision Avoid conflicts of interest; use of independent

committee in non-arm’s length situations Review of critical deal documents or summaries Appropriate advice sought from outside experts such

as accountants, financial advisors, compensation consultants, valuators, etc.

Regular consideration of options and alternatives Opportunity for board to ask questions and seek

answers


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Duties of Directors

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Duties of Directors

Fiduciary duty and duty of care Act honestly and in good faith to the best interests of the

corporation Exercise care, diligence, and skill that a reasonable person

would exercise in comparable circumstancesDuty to comply

CBCA, articles, bylaws Unanimous Shareholder Agreement

Non-delegable matters Filling Director or Auditor positions Issuing securities, declaring dividends Approving annual financial statement


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Duties of Directors

Personal liability Issues for less than fair value non-money

consideration Redemption of and dividends on shares Improper financial assistance Improper indemnity Wages (6 months)

Right of reliance – a defense Financial statements Experts

Auditors, lawyers, engineers, financial advisors, other professionals


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Emphasis on fiduciary duty

Directors must act honestly and in good faith with a view to the best interests of the corporation Corporate interests must be placed above personal

interests Directors must act in the interests of the corporation as a

whole rather than interest of any particular Shareholder, group of Shareholders, or other stakeholders


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Conflict of interest and duty

Directors must not enter into agreements in which there exists, or could exist, a conflict of interest and/or duty

CBCA section 120 requires disclosure of interest in material contract or transaction

o Applies to a director or officer who (a) is party to the contract or transaction, (b) is a director or officer of a party to the contract or transaction or (c) has a material interest in a party to the contract or transaction

o Must disclose nature and extent of interest and record in minuteso Must not vote (subject to exceptions)o Must be fair to the corporation when approvedo If procedures not followed, the contract or transaction may be set

aside by a court and the director or officer required to account to the corporation for any profit or gain realized


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Board meetings

Directors are responsible for effective leading of board meetings to ensure that required protocols, procedures, and due diligence are adhered to Recording sufficient information to reflect how

decisions were made in the event anything is challenged in court

Ensuring presentations and reports are accurately captured in minute package

Ensuring accurate notes are kept that can be used in court cases, as required


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Director evaluation

Appraisals must include specifics, clearly defined steps and practices, commitment from Directors and the CEO/Executive Director/General Manager

Assessment must recognise the distinctive set of competencies that each Director brings to the corporation


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Director evaluation

Knowledge of the businessKnowledge of senior managementInitiativePreparationTimeJudgement and candorIntegrity


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Electoral Policies and Guidelines for Officials

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Strong electoral policies

Give Shareholders and voters and equal say in the selection of people who will represent them and their best interest

Encourage participation Policies must make it easy for people to participate in the

process in an informed and meaningful way

Based in fairness All qualified candidates must have equal opportunity to

declare their candidacy and be able to participate in the process

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Strong electoral policies

Transparent Candidates must be accountable for being transparent

regarding their motivation, potential conflicts of interest, future goals for the organization and plans for achieving those goals

Ensure privacy Private ballots are essential

to ensure voters cannot be intimidated or bribed into voting a particular way

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Strong guidelines for duties of elected officials

Required to protect the democratic process Failure to protect the democratic process can result in

leaders who behave unethically and Shareholders who become disillusioned and stop participating in the process

Help to ensure prompt and proper delivery of services

Guides appropriate use of funds

Protects against waste of resources and inefficiencies

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Protect against theft

Eliminate conflicts of interest

Protect against bribery

Protect against influence

Protect confidential information

Protect against fraud

Strong ethics guidelines

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Questions?

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THANK YOU!

Thank you for the opportunity to present to you today!

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Good corporate governance

Leadership & Management