This article was previously published in May 2011 issue of
Board ethics have never been so closely scrutinized by the
public and regulators. Having the proper policies and protocols in
place – before an ethical lapse is discovered –
Directors' obligations arise from a variety of sources. At
base is the duty set out in corporate legislation such as the
Canada Business Corporations Act (CBCA), which requires
directors to act honestly and in good faith, with a view to the
best interests of the corporation, exercising the due diligence
that a reasonably prudent person would in the circumstances, and
Further duties are imposed – or strongly suggested
– by regulators and by institutional shareholders and
shareholder advisory groups. These include obligations that boards
develop and publish mandates and policies; that they be comprised
of a majority of "independent" directors; that chair and
CEO roles be separated; that directors be elected individually by
majority voting; and that shareholders be given a "say on
pay" (advisory vote on the compensation philosophy).
Media views and ratings on governance can affect board
practices, and boards themselves implement a variety of policies
(codes of conduct, confidentiality, insider trading, harassment,
privacy and whistleblower protections). Taken together, these
factors form a complex web of governance duties.
What are directors' responsibilities when it appears that
there may have been a failure to comply with a governance duty?
Some violations rise to a level at which public disclosure must be
made, as for instance when a violation results in a "material
change" in the affairs of a public company. Some may suggest
confidential disclosure that may operate to exonerate a reporting
director. Professional obligations may impose distinct obligations
on directors who are lawyers or accountants.
But some violations are more subtle. What is a board to do with
a possible violation of a trading blackout? Causes of the violation
may range from poor systems administration to illegal insider
trading. The Divisional Court, in Rowan, confirmed the
OSC's decision that violation of a trading blackout policy is
not simply a private matter between the company and the offending
director: rather, the OSC can become involved under its public
interest jurisdiction, since governance policies form part of the
securities regulatory environment.
It is therefore necessary for the board to get the facts, and
this will usually mean an investigation. This doesn't
necessarily require a grand inquisition. However, a board must
accept that the ultimate destination may not be known as the
journey begins, and that its own conduct may be reviewed. Boards
must take care that their own procedures do not become objects of
An investigation will typically begin with a request by a board
committee to preserve records. Adverse implications may be drawn
from document destruction or e-mail deletion occurring once the
need for an investigation is known. Thereafter, the matter should
proceed by way of a structured inquiry. It will usually be
appropriate for the investigation to be led by independent external
counsel. Independence may require counsel who do not normally act
for the company, and who may therefore be too close to management.
Externality means that investigating counsel cannot be called as
witnesses, and communications with them are privileged. An
independent and external investigation lends credibility to the
exercise, particularly in the eyes of regulators or law enforcement
personnel who may become involved. The investigation may begin with
a review of documentary evidence and a few interviews, but it must
be ready to change direction based on what may be learned in its
The investigation phase will typically end with a report to the
supervising director committee outlining the facts as found,
conclusions that may be drawn, and sanctions or revised procedures
that may be considered. In the case of trading during a blackout
period, the conclusions may be that directors were not adequately
aware of the policy, or that the policy may need to be called to
their attention regularly. A careless director may require
admonition and perhaps re-education on corporate policies. It may
be appropriate to introduce revised procedures designed to ensure
awareness of policy requirements and prompt reporting of any
transgressions. If the facts suggest more than innocent or careless
error, additional action may be appropriate. This can include
requests that a director resign or disclosure to regulators and law
Directors must be vigilant in policing themselves.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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