Canada: Due Diligence Before & After Becoming A Director

Directors owe certain duties to the corporation when they take on the role and responsibility of sitting on a board. Every director should be aware of these duties and should act in accordance with these if they wish to avoid potential liability.

  1. Directors have a duty to behave in an honest and fair manner by sharing important information and preventing harm to their corporation.
  2. Directors owe a duty of loyalty to the corporation and their fiduciary obligations lay first and foremost to their organizations.
  3. Directors face potential liability if they do not attend meetings and fail to dissent within seven days of receiving the minutes.
  4. Directors must be adequately prepared for board meetings and must be sufficiently informed of material information to make effective and accurate decisions.
  5. A director should insist on access to all relevant information to be considered by the board.
  6. Directors have a right to inspect corporate records and other documents related to the corporation.
  7. Directors should not support a course of action if there is any doubt that a proposed course of action is inconsistent with a director's fiduciary duties. Seek independent legal advice as soon as possible to clarify the issue.
  8. Directors cannot shirk their responsibilities by leaving everything to others. Reliance on co-directors and officers should not be unquestioning.
  9. Directors should not rely blindly on management or on subordinates if they have failed to act where they knew or ought to have known that something was not right.
  10. Directors should consult with a lawyer if he or she is uncertain about the exercise of his or her duties or responsibilities.

Due Diligence Before Becoming a Director

While it is impossible to be aware of every obligation and liability imposed upon a director, a potential director can limit his or her potential liability by conducting comprehensive due diligence and recording the results prior to becoming a director.

Outlined below are some of the steps that a potential director should take in conducting his or her due diligence. The considerations will vary from organization to organization, depending on its make-up.

  1. Consider why you want to be a director.
  2. Determine whether the organization is financially strong and stable.
  3. Request and receive a written job description detailing specific responsibilities expected of a director and what committees you may be requested to sit on.
  4. Find out what the organization's selection criteria are for directors.
  5. Speak to other directors to get their perspective on the organization.
  6. Find out what materials are usually circulated to directors before meetings and if they are sent on a timely basis.
  7. Find out how much time will have to be devoted to the position.
  8. Ascertain the organization's policy for appointing the chair of the board and the role of the chair.
  9. Find out if the organization pays for the services of independent outside advisers such as lawyers and accountants when it is deemed necessary.
  10. Request and take the opportunity to review board and committee minutes for the past two or three years.
  11. Find out if there is an orientation program for new directors.
  12. Ask whether the organization has guidelines and procedures to deal with conflicts on the board.
  13. Request and receive a report on the current areas of concern for directors.
  14. Request and receive from the organization's solicitors details of any outstanding and pending litigation or regulatory proceedings against the organization and/or its officers and directors.
  15. Ascertain if there are formal policies for compliance with regulatory requirements.
  16. Make sure the Act that governs the organization allows the indemnification of directors.
  17. Obtain a contractual indemnity from the organization and from the person (be it a friend or client) who appointed you.
  18. Ascertain whether directors' and officers' insurance coverage is available to the direc-tors and determine its limits and exclusions.
  19. Ensure that investments made by the organization comply with relevant legislation, especially for charitable corporations.

Due Diligence While Serving as a Director

Directors who carry out their responsibilities in a diligent way are unlikely to incur personal liability. The director has to establish that he or she was diligent in making the decision that he or she made. To this end, there are a number of things a director could and should do.

  1. Attend as many meetings of the board or any committee as possible.
  2. Read the material sent to directors before a meeting.
  3. Take accurate notes at board meetings and review minutes to ensure accuracy.
  4. Make sure concerns, if any, are set out in the minutes of the meeting.
  5. Consult independent experts where necessary.
  6. Be thoroughly familiar with operations of the organization.
  7. Maintain familiarity with the financial status of the organization.
  8. Determine from management that there are systems in place to monitor financial variations that should be drawn to the attention of management and the board.

What the Organization can do to Protect Directors

In many cases, the organization can take measures to protect its directors from liability. While this is not an exhaustive list, it provides some useful ways in which organizations can take an active role in protecting its directors.

  1. The organization should appoint a staff person to be the "point person" in the organization to answer questions of board members so there is consistency in answers.
  2. There should be a policy that candidates have some financial literacy.
  3. Ensure that directors are adequately prepared for meetings.
  4. Ensure via the Chair that there is ample time for discussion of each issue at a board or committee meeting.
  5. Restrict directors to membership on no more than a set number of other boards.
  6. Organizations should ensure that appropriate directors and officers insurance is available to the directors.
  7. Establish a Code of Conduct for Directors and ensure that directors abide by the established rules.

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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Ira Stuchberry
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