Canada: Above Board @ Gowlings - March 2005

Last Updated: March 23 2005

Edited by Julie-Martine Loranger


  • Director Liability in the New Era of Corporate Governance
  • New Corporate Governance Practices
  • A Look to the Future

Director Liability In The New Era Of Corporate Governance

The last few years have witnessed an explosion of corporate scandals. Class actions, legal proceedings and investigations have grown exponentially since the early 2000s and regulators have broadened the scope of personal accountability to include corporate directors.

To restore investor confidence and thwart future scandals, American and Canadian regulators have scrambled to implement corrective legislation with greater due diligence requirements and stiffer penalties for illegal and/or questionable practices.

As corporate ethics and accountability become the underpinning of today's corporate culture, directors would do well to take precautions to limit their personal liability. These measures may include demonstrating compliance with codes of conduct and ethics and other measures of due diligence.

The public sector is watching closely as the underlying principles of new corporate governance practices for reporting issuers are sure to have an impact on corporations and their directors.

The Impetus for New Corporate Governance Practices


The technology bubble bursts, leading to a collapse in the financial market.


The first signs of corporate scandal emerge; investigations are launched and investor class actions multiply.
Charges are levelled against, among others, directors, who are implicated in the unfolding scandals.


New corporate governance rules are instituted in the United States (Sarbanes-Oxley). Eliot Spitzer scrutinizes Wall Street's mutual fund and insurance practices.


Domestic maven, Martha Stewart, is incarcerated for obstruction of justice. That same year, the Canadian Criminal Code is amended to include new offences pertaining to insider trading and related capital market misconduct.


Nortel sues its ex-directors; twelve Nortel executive officers to give back their corporate bonuses; the organization enlists an "ethics expert" to help it rebuild its image.
Ten Worldcom directors offered to personally reimburse $18 million as part of a class action settlement negotiation in order to indemnity investors who filed proceedings following the corporation's bankruptcy in 2002; plaintiffs insisted on a condemnation against members of the board.

New Corporate Governance Practices

After more than two years of reflection and consultation between the Exchanges and the Canadian Securities Administrators (the "CSA"), the CSA finally published, for consultation, new harmonized corporate governance practices for Canada, applicable to all reporting issuers (public corporation), including unincorporated issuers (e.g., income trusts and limited partnerships). Some entities were exempt, notably, investment funds, issuers of asset-backed securities and foreign issuers, and emerging issuers (namely issuers listed on the TSX Venture Exchange (TSX-V) have lesser obligations.

The objective of these new corporate governance practices is, among other things, to restore and maintain investor confidence.

The new corporate governance practices include:

  1. Policy Statement 58-201, Corporate governance guidelines ("58-201"); and
  2. National Instrument 58-101, Disclosure of corporate governance practices ("58-101") (in Québec, Regulation 58-101) (collectively the "New Corporate Governance Practices").

The period for public comment ended on December 13, 2004.

The CSA expect the New Corporate Governance Practices to be adopted and to come into force for the proxy solicitation period of 2005.

The implementation of a code of conduct and ethical rules for the Board of Directors, as well as the recommendation to offer continuing education opportunities for directors, are now top priority.

National Policy 58-201 provides guidance on corporate governance practices which, without being prescriptive, establish guidelines for issuers.

Issuers are encouraged to consider the guidelines in developing their own corporate governance practices.

The following corporate governance guidelines are contained in the policy:

  1. maintain a majority of independent directors on the board of directors;
  2. appoint a chair of the board or a lead director who is an independent director;
  3. hold regularly scheduled meetings of independent directors at which members of management are not in attendance;
  4. adopt a written board mandate;
  5. develop position descriptions for the chair of the board, the chair of each board committee, and the chief executive officer;
  6. provide each new director with a comprehensive orientation, and provide all directors with continuing education opportunities;
  7. adopt a written code of business conduct and ethics;
  8. appoint a nominating committee composed entirely of independent directors;
  9. adopt a process for determining what competencies and skills the board, as a whole, should have, and apply this result to the recruitment process for new directors;
  10. appoint a compensation committee composed entirely of independent directors; and
  11. conduct regular assessments of board effectiveness, as well as the effectiveness and contribution of each board committee and each individual director.

Regulation 58-101 requires an issuer to disclose, in its annual Management Information Circular sent to shareholders, information on the corporate governance practices it has adopted and to file, as the case may be, the written code of conduct as adopted.

In order to avoid having duplicate sets of rules, The Toronto Stock Exchange will abrogate its corporate governance guidelines and disclosure requirements as soon as the New Corporate Governance Practices come into force.

Directors' Liability

In Canada, the legislation provides, amongst other things, that directors must act honestly and in good faith in the best interest of the corporation. Directors also have a duty of care and a duty to inquire. They must act as a reasonably prudent person would do so in comparable circumstances.

A Look To The Future

  • Breaches of the codes of conduct and ethics could potentially increase director liability. The New Corporate Governance Practices will serve to illustrate the standards that shareholders and other stockholders will expect of reporting issuers.
  • The Courts may find new tools to assess directors' conduct in the codes of ethics and in corporations' board and committee charters.
  • The New Corporate Governance Practices apply to reporting issuers, but the underlying principles will indeed have a profound effect on all corporations and similar entities.
  • Directors should understand and know their legal position, the roles of boards and of board committees in order to mitigate personal liability.

Gowlings is available to answer your questions on the New Corporate Governance Practices, directors' liability and continuing education for directors.

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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