The roles and responsibilities of a board of directors in Canada
Canadian corporations are primarily ruled by the Canada Business Corporations Act. Laws for corporations in Canada are similar to many other corporate laws in the United States and other parts of the world, particularly as they pertain to fiduciary duties and conflicts of interest.
Canadian board directors are responsible for knowing their duties and responsibilities. Board directors who fail to comply with national and local statutes may be held liable for their actions in court. The two primary duties in Canada are fiduciary duties and the Duty of Care.
Canadian Board Directors and Their Fiduciary Duties
Above all, Canadian board directors must maintain a preeminent view toward the corporation's interests. With regard to every decision and duty, board directors must act honestly and in good faith, always placing the interests of the corporation ahead of their own.
Board directors may not disclose confidential information about the corporation. Directors who acquire significant business information from others have a duty to share it with the rest of the board. This directive also holds true regarding calling the board's attention to opportunities in which they may be interested.
Similar to other global corporate laws, Canadian board directors aren't allowed to pursue business opportunities for their own benefit that they should be pursuing on behalf of the corporation.
Canadian courts are clear on their expectations for board directors and hold them strictly accountable for their actions and their failure to act.
Canadian Board Directors and the Duty of Care
Duty of Care is a board director duty that is internationally accepted and respected. Duty of Care requires board directors to exercise the same care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
Duty of Care requires board directors to take appropriate steps so that they can make sound, informed decisions. This duty requires them to make sure that they leave no stone unturned in gathering all available information and to assess that information critically before making decisions or recommending decisions to the board.
Canadian corporate law assumes that board directors will seek input from the recommendations of management and other corporate advisors and will test that information.
Canadian regulatory authorities require all board directors to abide by the Duty of Care. Board directors with special skills or experience may be expected to apply their skills when making decisions that affect the corporation and may be held to a slightly higher standard under certain situations.
Canadian Board Directors and the Duty to Manage
In addition to fiduciary duties and the Duty of Care, the Canada Business Corporations Act outlines board directors' Duty to Manage. This statute outlines the duties that board directors must accept, as well as matters that they must refrain from participating in.
The law specifically states:
"Subject to any unanimous shareholder agreement, the directors shall manage, or supervise the management of, the business and affairs of a corporation.'"
Canadian corporate law requires board directors to provide annual statements to the shareholders. They must also abide by all statutes for corporations, including laws for employment, tax and other matters.
Canadian board directors should also be advised about matters that are solely their responsibility. Canadian law doesn't allow them to delegate certain matters. In specific terms, board directors may not delegate the following responsibilities:
- Submission of questions to shareholder votes
- Authorization of an issuance of securities
- Declaration of dividends
- Approval of financial statements, management proxy circulars, takeover bid circulars and financial statements
- Adoption, amendment or repeal of corporate bylaws
Canadian Board Directors Must Avoid Conflicts of Interest
In the past, Canadian law prohibited board directors from having any kind of a conflict of interest. The laws have changed to allow for conflicts of interest as long as board directors disclose the conflict and abstain from discussions and votes on matters where there is a personal or professional conflict.
Failure to Comply With Legal Duties Subjects Board Directors to Personal Liability
Canadian corporate laws and case laws state that board directors may be held personally liable for their actions of poor decision-making as well as for their unwillingness to act in circumstances where they needed to act. This is because a breach of fiduciary and statutory duties is illegal.
A board of directors may not allow the corporation to act outside of its authority, which is another matter for which board directors may be held liable.
Courts will hold board directors liable for infractions that they commit as individual directors as well as those they make on behalf of the corporation. In addition, Canadian courts will hold board directors personally liable for failing to perform other duties, such as:
- When the corporation fails to act
- When board directors fail to fulfill their responsibilities
- When board directors fail to provide proper oversight over the corporation
Directors and Officers Insurance Provides Limited Indemnification for Canadian Board Directors
Most Canadian corporations purchase Directors and Officers insurance policies to protect board directors from liabilities that they may face during the course of their duties as board directors.
Board directors should be aware that Directors and Officers policies carry limits and exclusions. Insurance policies have upward limits. Board directors need to be sure that they review Directors and Officers policies to make sure that the limits are high enough to protect them.
Directors and Officers policies also contain exclusions for circumstances where board directors fail to act consistently with their fiduciary duties. In the event of a claim, insurance companies must ensure that board directors acted in lawful ways.
Canadian corporations often include director indemnity provisions in their bylaws.
Basic Responsibilities of Canadian Board Directors Are Part of Good Corporate Governance
Canadian laws are quite similar to the laws for corporations in the United States and many other parts of the world. The laws are clear and form the basis for good corporate governance. Essentially, board directors need to be vigilant about performing their fiduciary duties and Duty of Care. They need to be aware that these duties apply to their actions, as well as their failure to act. Finally, Canadian board directors need to have a good understanding of the liabilities that accompany board directorship and compare them with the coverage, limitations and exclusions that are inherent within D&O insurance policies.
