Good Corporate Governance

and Duties of Directors

5 TH M I N I L L B F O R A B O R I G I N A L
LEADERSHIP COURSE
MARCH 15, 2016

CHRIS HYLTON
&
CHARLENE BRUNO
 Disclaimer
2

The information presented to you today is considered

to be general best practices. This is not intended to
provide expert counsel or advice.
Speaker Bios
3
 Learning objectives
4

 Understanding general rules around corporate

governance

 Understanding the duties of directors

 Understanding the impact of strong electoral

policies and guidelines for elected officials
Image courtesy of www.healthcaregovernancereview.org
5
Corporate Governance
6
Key elements of good corporate governance
7

 Corporate framework

 Quality decision making

 Policy development

 Duty of care including fiduciary duty

 Defense and protection

 Standard of review
Corporate framework based on critical functions
8

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

 9

Corporate framework based on critical

Bylaws functions
• Officers and
their roles
• Director
meetings
• Shareholder
meetings
• Indemnification

• Signing
authorities

Source: Haskayne School of Business - Executive Education

Corporate framework based on critical functions
10

Internal authority
 Corporation
 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

Source: Haskayne School of Business - Executive Education

Corporate framework based on critical functions
11

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

Source: Haskayne School of Business - Executive Education

Corporate framework based on critical functions
12

Internal authority (cont’d)

 Audit Committee
 Appointed by Board
 Required in a public corporation
 Minimum of three
 Independence requirements

Source: Haskayne School of Business - Executive Education

Corporate framework based on critical functions
13

Internal authority (cont’d)

 Officers Auditor
 Designated and appointed  Appointed by
by Directors Shareholders
 Delegated responsibility  May be dispensed with in
from the Board a non-public corporation
 Day-to-day management  Provides audit opinion on
of the corporation the corporation’s financial
statements
Source: Haskayne School of Business -
Executive Education
Corporate framework based on critical functions
14

 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
Source: Haskayne School of Business - Executive Education
 15

One of the
cornerstones
of good
corporate
governance
is consistent
and quality
decision
making.
Quality Decision Making
 Quality decision making
16

 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 majority

Source: Haskayne School of Business - Executive Education
 Quality decision making
17

 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
Source: Haskayne School of Business - Executive Education
 18

Policy
Development
 Board governance policy development
19

Directors’ and Officers Liability Insurance

 Director 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
Source: Haskayne School of Business - Executive Education
 Board governance policy development
20

 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))

Source: Haskayne School of Business - Executive Education

 Board governance policy development
21

 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
 Duty of care
22

 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

Source: Haskayne School of Business –

Executive Education
 Duty of care
23

 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

Source: Haskayne School of Business – Executive Education

 24

Fiduciary duty
includes
adherence to
guidelines
around
confidentiality
and disclosure

Fiduciary Duty
 Fiduciary duty
25

 Confidentiality
 Strict adherence to maintaining confidentiality of information

 Disclosure
 Information affecting the corporation in a vital aspect of its
business

Source: Haskayne School of Business – Executive Education

 Fiduciary duty
26

 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
Source: Haskayne School of Business – Executive Education
 Defense and protection
27

Due diligence defence Indemnification provisions

 Directors and officers  Corporate statutes

should be aware of  Corporate bylaws
exposure to personal  Contractual – Federal
liabilities Agreements
 Must be a clear
understanding of what
constitutes appropriate
diligence
Source: Haskayne School of Business –
Executive Education
 Risks to Directors and Officers
28

 Criminal liability
 Fraud, personal profit

 Employee injury or death

 Tort liability
 Negligence

 Breach of fiduciary duty or duty of care

 Misrepresentation

 Regulatory
 Workers’ Compensation

Source: Haskayne School of Business – Executive Education

 Risks to Directors and Officers
29

 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
Source: Haskayne School of Business – Executive Education
 Director and Officer liability insurance
30

 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

Source: Haskayne School of Business – Executive Education

 Director and Officer liability insurance
31

 Policies should cover

 Directors

 Officers

 Employees (generally as co-defendants)

 Spouses (covered by policy as protection for personal assets)

 Trustees

Source: Haskayne School of Business – Executive Education

 Director and Officer liability insurance
32

When obtaining D & O liability insurance,

corporations should consider
 Ability of company to fund deductible
 Other insurances purchased
 Unusual business structures covered
 Income trusts, partnerships, joint ventures
 Cancellation policy
 Signatures required

Source: Haskayne School of Business – Executive Education

 Director and Officer liability insurance
33

 Conduct exclusions
 Payment of defence costs for allegations of misconduct

 Coverage for statutory liabilities

 Director share limits with
 Entity

 Employment practices

 Fiduciary/Pension/Benefits

 Opportunity for Directors to consult on the scope

and structure of the policy

Source: Haskayne School of Business – Executive Education

Standard of review for corporate governance
34

 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
Source: Haskayne School of Business – Executive Education
Duties of Directors
35
 Duties of Directors
36

 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 circumstances
 Duty to comply
 CBCA, articles, bylaws
 Unanimous Shareholder Agreement
 Non-delegable matters
 Filling Director or Auditor positions
 Issuing securities, declaring dividends
 Approving annual financial statement

Source: Haskayne School of Business – Executive Education

 Duties of Directors
37

 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
Source: Haskayne School of Business – Executive Education
 Emphasis on fiduciary duty
38

 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

Source: Haskayne School of Business – Executive Education

 Conflict of interest and duty
39

 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 minutes
o Must not vote (subject to exceptions)
o Must be fair to the corporation when approved
o 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
Source: Haskayne School of Business – Executive Education
 Board meetings
40

 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

Source: Haskayne School of Business – Executive Education

 Director evaluation
41

 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

Source: Haskayne School of Business – Executive Education

 Director evaluation
42

 Knowledge of the business

 Knowledge of senior management
 Initiative
 Preparation
 Time
 Judgement and candor
 Integrity

Source: Haskayne School of Business – Executive Education

Electoral Policies and
Guidelines for Officials
43
 Strong electoral policies
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 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
 Strong electoral policies
45

 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
 Strong guidelines for duties of elected officials
46

 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

 Strong ethics guidelines
47

 Protect against theft  Protect against

 Eliminate conflicts of
interest
 Protect against bribery
influence
 Protect confidential
information
 Protect against fraud
Questions?
48
 THANK YOU!
49

Thank you for the opportunity to

present to you today!
 About us
50

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 Contact us
51

#517-7620 Elbow Drive SW

Calgary, AB T2V 1K2

403-264-5288 www.hylton.ca
800-449-5866 chris@hylton.ca
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