Canada: When Directors Should get Worried

Last Updated: January 27 2005

Published in Corporate Governance Review, August/September 2004.

Directors have significant responsibilities, but so do those in many other jobs and roles. There is a big difference between the need to be vigilant and to take your role seriously, and the need to be worried about that role.

Most of the time, directors can be exclusively in a vigilant-responsible mode. They should have little need to lie awake at night if they have justified confidence in management; they receive and scrutinize suitable information; the board and its committees are suitably staffed, engaged and focused; and board and committee meetings are effective.

But so many companies have failed in spectacular fashion in the recent past, and directors have been criticized (and sanctioned, in some cases) for their alleged failures to prevent the crashes. When is this criticism fair? When should directors get worried?

Directors are not criminal investigators, whose job is to probe beneath apparently supportable assurances to uncover purposeful frauds (although sometimes, directors’ efforts and concerns can lead them to involve other experts in investigations of this sort). But directors must develop and operate suitable risk-management strategies to ensure that nothing short of planned criminal behaviour would cause unexpected serious damage. The strategies can be structured and intentional or can simply require capable directors to be alert to warning signs.

Having a formal risk-management strategy requires the board to continuously manage the risks of the business. These measures would include developing and measuring progress against a plan and annual budget, understanding the business (including the industry and the company’s place therein) and being aware of changes (in the macro-environment, market, competitors, regulation) that could affect the company. The board must also monitor risks relating to the management, including ensuring that the right people (in terms of competence, integrity and teamwork) are running the business, that succession plans are sound and that formal risk-management procedures (suitable check processes, a chief risk officer function, suitable internal control processes—now formalized through Sarbanes-Oxley 404 audits) are in place. The board must be comfortable that it is receiving the right information, in a timely manner; that it is spending adequate meeting time on risk management; that management is candid with the board; and, in general, that it has confidence in management. And finally, the board must be confident that adequate arrangements are in place (suitable advice has been sought, board processes are proper, effective directors’ and officers’ insurance is in place) to protect the board if things go wrong.

But beyond all of this, there is no substitute for directors who are alert to warning signs that something is wrong. The following list, while not exhaustive, is illustrative of signals that increased vigilance may now be in order:

  • Corporate governance processes are not being followed.
    • Management does not deliver information in a timely manner.
    • There are surprises in financial or other business results (key customer losses, changes in deals). Particular note should be taken if surprises occur regularly.
    • There is an unusually high turnover of employees.
    • When the board requests certain information, management is evasive, provides only selective information or unduly delays providing information.
    • Management is unavailable to the board (either it will not respond to board enquiries or management, other than the CEO, is discouraged from contact with the directors).
    • The board becomes aware that internal control processes of any sort (from financial compilation to contract signing procedures) are inadequate (the intended purpose of Sarbanes-Oxley 404 audits).
    • Board members have a sense of discomfort with the corporate culture or the candour of any employee (on the theory that what is observed anywhere often reflects the leadership culture at the top).
    • The board receives express warnings of trouble. These are far more frequent than one might presume. They come in the form of warnings from advisers (for instance, in auditors’ annual reports on issues with management or on financial controls), from members of management (particular board members tend to bond with particular executives, who often share concerns with their "director friend") or from other directors (directors sometimes consult one another to assess whether a discomfort is warranted).

    If even one of these signs appears, it is time for the directors to get out of business-as-usual mode. In my experience, if there is any sign of trouble, the trouble is far worse than the sign, and the directors should not lose any time in beginning to investigate the problem(s).

    Directors’ and Officers’ Insurance

    When things go wrong, little can ameliorate the potential for embarrassment and the requirement to spend considerable time in discharging unpleasant responsibilities (in courts, with regulators, in the media). Sound legal and public relations advice may soften the blows, but some of them must be absorbed.

    On the other hand, suitable insurance coverage may (virtually) completely address the financial risk, that could otherwise be devastating to an individual director (who is subject to unlimited liability—liability to the full extent of his or her assets). A typical D&O insurance policy will cover the directors (and executives) for liability for which they would otherwise have to respond personally in cases in which the directors (or executives) have failed to act as they should. Coverage does not extend to willful criminal behaviour, but will typically cover most examples of negligence.

    The D&O insurance market is an inefficient one. While there is a reasonably stable group of brokers who sell the insurance, there is a large group of potential insurers who choose to increase or reduce their exposure to this coverage on a fairly regular and often sudden basis. The result is widely varying rates for comparable coverage, the non-availability of reasonably priced coverage to some companies, widely varying coverages and exclusions, differential co-insurance and top limit amounts for comparable premiums, and a variety of other discrepancies. D&O insurance details tend to be poorly understood by directors, who (if they focus on this at all) focus on the deductible (when the insurance coverage starts) and the limits (what is the maximum coverage). D&O insurance is the ultimate backstop for directors. It is important to obtain competent and adequate advice on the nature and cost of coverage. Given the inefficiencies and certain conflicts that can arise in this market, it would be wise to solicit proposals from more than one broker when obtaining or renewing D&O coverage. Ultimately, having a reliable and capable broker with expertise in the area is essential. It is now becoming common for directors to have their D&O insurer make a presentation directly to the board. It is most unwise for directors to simply accept an executive’s assurance that "suitable D&O is in place. "

    Formerly a law professor at the Faculty of Law, University of Toronto, Barry Reiter has published books and articles on corporate governance, advisory boards, joint ventures, contracts, real estate, the legal process and debtor-creditor relations. His practice focuses on corporate development and finance of new-economy companies. Barry is Chair of Torys’ Technology Group, which handles all aspects of technology law.

    Torys LLP is an international business law firm with more than 330 lawyers in its Toronto and New York offices. The firm is known for its successful representation of clients in significant corporate transactions and cases.

    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.

    To print this article, all you need is to be registered on

    Click to Login as an existing user or Register so you can print this article.

    In association with
    Up-coming Events Search
    Font Size:
    Mondaq on Twitter
    Register for Access and our Free Biweekly Alert for
    This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
    Email Address
    Company Name
    Confirm Password
    Mondaq Topics -- Select your Interests
     Law Performance
     Law Practice
     Media & IT
     Real Estate
     Wealth Mgt
    Asia Pacific
    European Union
    Latin America
    Middle East
    United States
    Worldwide Updates
    Check to state you have read and
    agree to our Terms and Conditions

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    If you do not want us to provide your name and email address you may opt out by clicking here .

    If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.