Corporations - Directors Duties

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Client Letter - What this idea is about

This entire site is for educational or informational purposes only. You are not to use the forms, concepts, strategies, or knowledge without assistance from a professional. The author, the corporation, the ISP, Bob Parrish CPA, Bob Parrish CPA, P.C. or other parties related to those or this site do not guarantee or warrantee in any manner the suitability, usefulness, accuracy, timeliness, or results of any portions of this site, nor the links contained in this site which link to other areas. At times, information is taken from other sources and is believed to be accurate, but no verification or confirmation is performed. Furthermore, if any federal or state law invalidates a portion of this disclaimer, the other portions still apply. In addition, any allegations or actions are restricted to arbitration only and must be arbitrated by the Better Business Bureau in Sarasota Florida. Reading of these pages constitutes complete acceptance and agreement with all disclaimer provisions on all pages of this site. .......

Learning Objectives

What it does, Why it works - Plain English Analysis

This part of the guide sets out the function and mandate of the board of directors. It describes the fundamental corporate and common law duties of a director and the general standards applicable to the discharge of those duties. Finally, it identifies the remedies available to shareholders, creditors and others to ensure that directors discharge their responsibilities in the manner prescribed by law.

(a) Frequency
The frequency with which a board meets will vary from one corporation to the next. It will also depend, in part, on the particular corporate activities requiring specific board attention and on the number of matters that are dealt with primarily by committees of the board as opposed to the full board. Most companies schedule their full board meetings at regular intervals, such as each quarter, often coinciding with the need to deal with matters such as quarterly financial information and dividends. If a corporation is involved in a major restructuring, financing or acquisition, it may be necessary for the board and perhaps one or more of its committees to meet more frequently to consider and approve a particular course of action. The various committees meet around these general board meetings as required to satisfy their particular committee mandates.
Regular meetings of a board are often half-day or daylong events. If a meeting has been called for a specific purpose, it may be quite brief or it may last significantly longer than a regular meeting.
(b) Notice of Meeting, Attendance and Written Resolutions
All directors are entitled to receive notice of all meetings of the board and no director may be excluded from such meetings. Except for certain matters specified by the corporate statutes and subject to the corporation's by-laws, there is no general technical requirement to specify in notices the matters that will be discussed at the meeting. However, as a practical matter, notices do specify such matters and include considerable detail and background. Unless notice is given in accordance with the corporation's by-laws or statutory requirements, the board meeting is not duly constituted and the business conducted at that meeting is of no effect. For this reason, where a board meeting must be called quickly and there is not sufficient time to give the required notice, the corporation may ask directors who were not present at the meeting to sign a waiver of notice. A director's presence at the meeting constitutes waiver of the notice requirements.
Attendance at board meetings is central to the discharge of a director's responsibilities. Dates of meetings of the board are normally set well in advance, in order to allow directors to schedule all their affairs. Unless directors attend meetings, participate in discussions with other members of the board and question management, they are unlikely to be fully informed about the affairs of the corporation and cannot expect to be in a position to meet the standard of care and diligence imposed on them. In some jurisdictions, the corporation is required to disclose in the proxy materials how many meetings each director attended.
Directors should also bear in mind that they will be deemed to have consented to any board resolution passed in their absence unless they dissent in the manner prescribed by statute (described under "Voting" below), and that they will be liable along with all the other directors who did not dissent for the acts and omissions of the board.

What It does, Why it works - Technical Analysis & Citations

Tax Killers

This is about Activity Based Taxplanning - maximizing deductions, minimizing cash outlay and maximizing the amount of cash retained and the net worth.

Tax is a subject that many view in order to cut costs. Taxes are a cost just as any other cost. It happens this cost is somewhat intangible and is defined by legislation without a tangible item to view and control. The money is spent and the control of the expenditure is more appropriately administered by someone trained in the law.

Cost Killers

This is about Activity Based Costing - methods to cut costs, management accounting, management information systems, decision support systems - in general about being a manager.

What to gather - preparing for your CPA, your attorney, or preparing to start the job on your own

Assistance - What To Do - Forms - checklists, time-line to do, etc.

Spreadsheets & Computations

Contracts, Trusts, etc.

Reports Required

Checklists for Deployment

Checklist for Monitoring

Financial Accounting: Bookkeeping & Financials

Compliance - what is required for protection, defense, etc.

Alerts & Dangers - Risks, Asset Protection, IRS Defense

INTRODUCTION

DUTIES OF DIRECTORS

Function of the Board of Directors
Manage versus Monitor
Mandate of the Board

Standards of Performance
Fiduciary Duty
Care, Diligence and Skill
Business Judgment

To Whom are Directors Accountable?
Interests of the Shareholders
Interests of Other Stakeholders

Reliance on Management, Financial Statements and Advisors
Reliance on Management
Reliance on Financial Statements
Reliance on Advisors

Taking Action Against the Directors
Oppression
Derivative Action
Compliance Orders

CORPORATE GOVERNANCE

Membership of the Board
Number of Directors
The Independent Director
Chair
Qualification
Election and Term
Remuneration
Vacancies
Resignation and Removal

Board Meetings
Frequency
Notice of Meeting, Attendance and Written Resolutions
Location and Telephone Meetings
Quorum
Voting
Minutes

Delegation
Board Committees
Audit Committee
Special Committees

Directors' Conflict of Interest
When Does a Conflict Arise?
Voting and Abstaining from Voting

Confidential Information
Corporate Opportunity
Duty of Confidence and Insider Trading

Information Management
Information Provided to Directors
Financial Statements
Timely Disclosure

Securities and Stock Exchange Requirements
Role of the Securities Regulator
Stock Exchanges

The Role of Shareholders
Shareholder Meetings
Shareholder Ability to Change the Board
Dissent Rights

DIRECTORS IN ACTION

Financing
Issuing Debt
Issuing Shares
(i) Purpose and Consideration
(ii) Shareholder Approval Required
Accessing the Capital Markets
(i) Private Placements
(ii) Public Capital
(iii) Proceeding with a Public Financing -
The Long Form Prospectus
(iv) Proceeding with a Public Financing -
The Short Form Prospectus
Dividends
(i) Discretion to Declare Dividends
(ii) Declaring the Dividend

Disclosure Obligations
Timely Disclosure
Announcing a Transaction
Financial Statements
Annual Information Form ("AIF")
Management Discussion and Analysis ("MD&A")
Executive Compensation
Proxy Rules
Insider Reporting and Trading

Dealing With a Controlling Shareholder
Ongoing Relationship with the Controlling Shareholder
Transactions Between the Corporation and the
Controlling Shareholder

Significant Transactions
Take-over Bids
Other Significant Transactions

Environmental Matters
Ongoing Compliance
Specific Occurrences
Acquiring an Interest in Real Estate

Facing Insolvency
The Role of the Board
To Whom Directors Owe Their Duty
Personal Liability

Derivative Products
Overview
What is a Derivative Product?
Issues for Corporate Directors
What Should Corporate Directors Do?

STATUTORY LIABILITIES

Impairment of Capital and Corporate Solvency Tests
Types of Payment
Corporate Solvency Tests
Defence and Penalty

Insider Trading
Directors as Insiders
Insider Trading Reports
Use of Inside Information
Defences
When is Information Disclosed

Disclosure Documents
Ongoing Disclosure Documents
Prospectuses

Liability for Offences Under the Corporate Statutes

Environmental Legislation
Offences
Due Diligence Defence
Penalties

Pension Matters

Tax Liabilities
Source Deductions and Other Remittances
Offences of the Corporation
Clearance Certificates
GST
Other Tax Statutes

MANAGING THE RISK

Limiting the Risk
Discharge of Responsibilities
Unanimous Shareholder Agreements
Trust Accounts and Letters of Credit
Resignation

Indemnities
Limitations
Tax Treatment
Mandatory Indemnity
Indemnities Contained in By-laws
Contractual Indemnities

Insurance
Acquiring Insurance
Terms of the Policy

When an Action is Brought

CONCLUSION

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INTRODUCTION
D irectors of corporations have good reason to be concerned about their responsibilities and potential liabilities. Society has become increasingly interested in corporate accountability and, in particular, the accountability of individuals who direct corporate behaviour. Demands for accountability have heightened in the last 10 years as banks and insurance companies in Canada and savings and loan corporations in the United States have failed, as the after-effects of highly leveraged take-overs have taken their toll, as consumer protectionism and environmental awareness have increased and as the recession has had an impact on businesses of every size. As a result, courts, regulators, legislators and shareholders are scrutinizing more closely the way in which directors discharge their responsibilities. In addition, legislators and courts have further increased the pressure on directors by making them subject to personal liability if the corporation breaches certain statutory requirements which promote certain social goals.

Directors are responding by monitoring more closely the activities of the corporations they serve and by evaluating more critically their exposure to liability as a result of the corporation's activities and financial condition. Directors are recognizing that, in order to discharge their duties with the necessary degree of care, they need to catalogue these responsibilities and the risk of liability associated with them. Directors are also recognizing that in many cases the risk can be managed if they understand fully the nature of their obligations.

This guide outlines certain of the responsibilities and liabilities imposed on directors of Canadian corporations. While the focus will be on public companies, private company directors have the same responsibilities and liabilities as their public company counterparts, other than those imposed by securities laws or stock exchange requirements. The difference between the two is usually found in the degree of public scrutiny of the directors' actions.

€ Part I sets out certain of the corporate and common law duties of directors and describes the general principles applicable to the discharge of those duties. It also outlines the manner in which the corporation, shareholders and third parties may enforce those duties.

€ Part II addresses corporate governance as it relates to the process by which boards of directors discharge their responsibilities.

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€ Part III discusses a number of decisions which directors typically face and highlights the issues which should be of particular concern to a director making such decisions.

€ Part IV describes some of the additional statutory duties imposed on directors, the penalties associated with a breach of those duties and the defences available.

€ Part V reviews the ways directors can protect themselves from liability, in particular through indemnities and insurance.

Reference will be primarily to corporations governed by the Canada Business Corporations Act (the "CBCA") and the duties and liabilities imposed on directors of those corporations. While many of the provincial corporations acts are substantially similar to the CBCA, there are certain differences from one statute to the next in the provisions dealing with directors. Certain of the significant differences have been highlighted, but directors should consult counsel to ensure that they are aware of all of the responsibilities imposed on them by their corporation's governing statute. Corporations which carry on business in certain regulated industries such as banking are not subject to these corporate statutes. However, the governing statutes of many of these corporations impose the same broad duties on directors as do the corporate statutes, in addition to certain additional responsibilities relevant to the particular industry in question. These industry-specific responsibilities are referred to occasionally, but are not treated exhaustively. Again, boards of directors should consult their legal advisors for advice on liabilities peculiar to their industry.

Reference is also made to the Guidelines for improved corporate governance contained in the final report of The Toronto Stock Exchange Committee on Corporate Governance in Canada (the "TSE Corporate Governance Committee") issued in December 1994 (the"TSE Report"). These Guidelines are designed to provide corporations with benchmarks for evaluating their own systems of corporate governance in such areas as the composition of the board of directors, the responsibilities of the board, board committees and individual directors, as well as the board's relationships with management, shareholders and controlling shareholders.

Finally, this guide identifies only a sampling of the more significant statutory duties imposed on directors. Directors must ensure that they are fully informed of all their responsibilities and potential liabilities in order to meet the standards imposed on them by law.

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I. DUTIES OF DIRECTORS A director's duty is owed first and foremost to the corporation. This duty is grounded in basic principles of good faith, stewardship and accountability. Requirements imposed both by the common law and various statutes seek to establish the parameters of this duty, without limiting the flexibility of these principles.

1. Function of the Board of Directors
The directors' role is one of stewardship. Directors are responsible for managing or, under some statutes, supervising the management of, the corporation. Shareholders make a financial investment in the corporation which entitles those with voting shares to elect the directors. If shareholders are not satisfied with the performance of the directors, they may remove the directors or refuse to re-elect them. Except for certain fundamental transactions or changes, shareholders normally do not participate directly in corporate decision-making and while, as a practical matter, boards want to know the views of the shareholders, strictly speaking, directors are not normally required to solicit or comply with the wishes of shareholders.

Directors have complete discretion to exercise their powers as they deem appropriate, subject to the constraints imposed by law. Each director must act honestly and in good faith with a view to the best interests of the corporation and must exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Delegation is permitted with certain exceptions and must be reasonable in the circumstances, but responsibility for major decisions and the exercise of general discretion will always be the responsibility of the directors.

(a) Manage versus Monitor
The complexities of modern business impose a number of constraints on the ability of directors to manage or even to supervise the management of a corporation. Most directors do not have sufficient expertise in all aspects of the corporation's business to be able to make many business decisions. In addition, directors generally do not have access to, control over or time to absorb all the information needed to manage the business. These constraints shape the role of the board of directors.

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The TSE Corporate Governance Committee recognized that a board may supervise, direct or oversee the business and affairs of a corporation, but cannot manage them, at least not in a day-to-day sense. This kind of management must be delegated to others.
Directors are not required to devote their full time and attention to the corporation's affairs. Rather, they perform their functions periodically, primarily in preparing for and attending meetings of the board of directors, and are usually not involved in the day-to-day operations of the business. While directors provide general direction to the corporation, for example, in respect of new markets or products or significant financing activities, they must delegate much of the responsibility for managing the affairs of the corporation to others. In most respects then, directors monitor rather than actively manage the corporation's business and affairs.
Responsibility for the day-to-day management of a corporation's affairs is delegated to the chief executive officer, chief operating officer and other senior executives who are responsible to, and report back to the board from time to time. Appointing these senior executives and evaluating their performance are among the most important functions of the board. The relationship between the board and senior management � some of whom typically also sit on the board � is critical to good corporate governance and to minimizing the risk of liability to directors. The board must have confidence in the abilities, judgment and integrity of the corporation's senior executives. Communication and candour between the board and management are critical if the board is to be confident that it is being kept fully abreast of issues and developments facing the corporation.
Notwithstanding the delegation to senior executives of very broad powers over a corporation's affairs, the board of directors must reserve to itself the ability to intervene in management's decisions and to exercise final judgment on any matter which is material to the corporation. Although there is no bright line separating the duties of the board from the duties of senior management, the overriding principle governing delegation is that the directors must retain ultimate control over the corporation. The directors must be sufficiently familiar with the business and affairs of the corporation to know that the corporation is being managed in an appropriate fashion. They must exercise sufficient leadership to ensure that the corporation is following a course which they have approved. Whether business decisions actually originate with the directors is less central to the board's function than whether the directors are monitoring how these decisions are formulated and implemented.
The image of the corporate director as a figurehead is not now, if it ever was, accurate. The old perceptions of directors as passive observers of the corporate process no longer apply. Directors are now more visible and assertive. While the day-to-day management of the corporation remains in the hands of senior management as a matter of practical necessity, the monitoring role of the board must be a proactive and effective one if the directors are to carry out their duties properly and avoid liability.
(b) Mandate of the Board
The mandate of the board will vary from corporation to corporation. The corporate statutes allow some flexibility in the way each corporation is governed to allow the parties involved to tailor the allocation of responsibility for running the corporation among shareholders, directors and management to suit particular needs and circumstances.
The board performs certain functions prescribed by statute and is normally involved in considering significant issues facing the corporation. For the most part, management determines what matters are put before the board. To a lesser extent, the directors themselves make this determination through standing resolutions, guidelines or by-laws initiated by the directors.

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Among the matters generally put before boards are financial statements, business plans, major capital expenditures, raising capital and other major financial activities, executive hiring, compensation, assessment and succession, issues relating to the corporation's products or services (such as quality and safety), decisions to devote resources to new lines of business, organizational restructurings and acquisitions and divestitures.
In order for a board of directors to discharge its responsibilities, it must not only be aware of and approve the general direction and plans of the corporation, it must also be satisfied that the plans which it has approved are being implemented consistently and that appropriate monitoring and audit systems are in place to ensure that the corporation's affairs are being run responsibly. This is done in part by the process of reviewing and approving materials such as budgets, operating plans and strategic plans and by seeking and relying on the advice of experts, both from within the ranks of the corporation's management and from outside the corporation.
Increasingly, boards are adopting comprehensive audits of particular aspects of corporate operations as an integral part of effective monitoring. Boards have always used audits in the accounting context, but now they are expanding their use in other areas. For example, environmental audits are common, and audits of sales and pricing policies are becoming increasingly common to ensure compliance with competition laws as are audits of purchasing procedures to confirm the integrity of tender processes.
Implementing appropriate audit procedures is important, even if there is no particular area of concern, because such procedures allow the board to satisfy itself about the day-to-day operations of the corporation's business and other aspects of management's activities which the board itself cannot realistically expect to oversee or review. The board usually receives audit results from outside experts or advisors who performed the audit and who are in a position to explain the results and their implications to the directors. In addition to being an effective and necessary part of the monitoring process, these procedures will in many cases be key in assisting directors to defend themselves against claims if it is alleged that they have fallen short of their legal obligations in discharging their duties.
The TSE Corporate Governance Committee, in discussing the issue of the mandate of the board, suggests that effective corporate governance requires every board of directors to assume responsibility for the stewardship of the corporation. As part of this overall stewardship responsibility, the TSE Report recommends that a board should explicitly assume specific responsibility for the following matters:
€ adoption of a strategic planning process;
€ identification of the principal risks of the corporation's business and insuring the implementation of appropriate systems to manage those risks;
€ succession planning, including appointing, training and monitoring senior management;
€ a communications policy for the corporation; and
€ the integrity of the corporation's internal control and management information systems.
The manner in which a board of directors carries out its mandate depends on the particular corporation, its business, size and geographic scope and the nature of delegation to management. In some corporations, directors may be involved in making major business decisions, while in others decision-making may be more decentralized. In some cases, directors may be expected to craft the corporation's long-term strategic plan, while in others this may initially be the responsibility of a sophisticated strategic planning department. Increasingly, boards are establishing committees of the board to assist in carrying out their role and responsibilities.

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Part of the directors' contribution is the unique perspective they bring to corporate management. This applies in particular to outside directors. It may be difficult, for example, for management to take a long-term view of the corporation's business, in particular where remuneration is tied to short-term performance. Some investors, too, tend to have a short-term orientation, and the price of a corporation's securities is, therefore, driven to some extent by short-term rather than long-term results. Directors may be able to provide a tempering influence by introducing a longer-term perspective into the corporation's actions.
The dynamics of the board may depend on the extent to which specific shareholder interests are represented on the board. In Canada, to a considerably higher degree than in the United States, large corporations tend to have a controlling shareholder. The shareholder will generally determine who sits on the board and may advise the directors on the action it wishes the corporation to take. Frequently, directors will be able to reconcile the interests of the controlling shareholder with their fiduciary duties and the right of the minority to be treated fairly. In some cases, where a corporation is a wholly-owned subsidiary of another, either the interests of the subsidiary will be identical to those of its corporate shareholder or there may be no other party whose interests could be prejudiced by the action which the shareholder wishes the subsidiary to take. Directors should, in any case, be aware that the law charges them with the same responsibilities and subjects them to the same liabilities, whether the corporation they serve is closely controlled or widely held.
The objectivity which directors, and in particular outside directors, contribute to the governance of a corporation is supplemented in some cases by an advisory board. An advisory board is typically composed of a number of senior business and professional people selected to provide an additional perspective on the business and plans of the corporation. The advisory board usually meets on an ad hoc basis, annually perhaps, and has no legal responsibilities to the corporation.
2. Standards of Performance
Directors derive responsibility and liability from a variety of sources. The corporation's governing statute (most often a corporate statute, but, in some cases, separate legislation such as that governing the banking or loan and trust industry) gives directors certain powers and imposes certain responsibilities, coupled with a prescribed standard of conduct. For public companies, securities and stock exchange requirements also impose duties of fairness and skill on the decisions reached by directors. These general principles are outlined in this section.
In addition to the corporate statutes, a wide array of other statutes, dealing with specific matters such as income tax or the environment, impose personal liability on directors if the corporation breaches those statutes. Further, directors may, in some restricted circumstances, be liable under general principles of common law for breach of contract or negligent misrepresentation as a result of actions taken in their capacity as directors. Directors may only be liable if they acted in such a deliberate and reckless way that they made the wrongful acts their own as distinct from the company's. For example, in the M & L Travel Ltd. case, the Supreme Court of Canada recently held the directors of a private corporation personally liable for a breach of trust by the corporation because they had full knowledge of the actions of the corporate trustee and, thus, knew of the breach of trust. By contrast, in Peoples Jewellers, an Ontario court struck out a claim against the Peoples directors personally for negligent misrepresentation in connection with the issuance of debentures because the directors had always acted in their capacity as directors and never in their personal capacity. This decision is currently under appeal.
(a) Fiduciary Duty
Directors are fiduciaries of the corporation they serve. This long-standing common law principle governs all aspects of the directors' relationship to the corporation and is codified in the corporate statutes in the requirement that directors

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act "honestly and in good faith with a view to the best interests of the corporation" in exercising their powers and discharging their duties.
The fiduciary relationship dictates a strict standard of conduct which includes loyalty and good faith and requires directors to avoid putting themselves in a position where their duty to act in the best interests of the corporation conflicts with their self-interest. The obligation is a broad and flexible one. For example, it precludes directors from taking advantage of opportunities which could be opportunities for the corporation.
Most directors, particularly independent or outside directors, have interests and activities beyond their function as directors which could on occasion give rise to a conflict of interest, or the appearance of such conflict. Notwithstanding the general principle, the corporate statutes prescribe a procedure for directors to deal with a limited number of circumstances in which their outside interests come into conflict with the corporation's interests. These are discussed in Part II.
A director's responsibilities to the corporation are not diminished, and may not be compromised, by other relationships the director may have. This applies to directors who are nominated by particular parties such as a major shareholder, a class of shareholders, a creditor or employees. A director's fiduciary responsibility to the corporation, rather than to a particular shareholder or other constituency, is the overriding principle governing the director's behaviour.
Holding multiple directorships may also put a director in a position of conflict. A director who serves on more than one board must be constantly vigilant about potential conflicts. Directors are not legally precluded from accepting several appointments, but they must carry out their fiduciary obligation to each corporation they serve. However, such directors may find themselves in a position of conflict of interest at some point, resulting in a potential breach of their fiduciary duty to one corporation or the other. Specific requirements apply when there are dealings between corporations that have mutual directors.
The recent Ontario Court of Appeal decision in PWA v. Gemini demonstrates the difficult position in which directors with conflicting interests may sometimes find themselves. PWA's nominees on the Gemini board of directors were involved in negotiating a transaction with another party that would have affected Gemini in a "vital aspect of its business". A majority of the court concluded that although PWA's nominees did not have to disclose all aspects of their negotiations, they were required to disclose that part of the negotiations that would have a serious and adverse impact on Gemini. By failing to disclose this information, PWA's nominees breached their fiduciary duty to Gemini. The court also held PWA responsible for this breach because it instructed its nominees to act contrary to their fiduciary duty. The PWA nominees were truly in a difficult position because they owed a conflicting duty to PWA to keep the negotiations confidential. In circumstances where the PWA nominees had to participate in the negotiations, they could only have avoided liability to Gemini by resigning from the board before becoming privy to the information they ultimately had a duty to disclose to Gemini. If the PWA nominees did not have to participate in the negotiations, they could have avoided liability by adopting procedures that would have prevented them from becoming privy to such information in the first place.
Inside directors, typically the chief executive officer of the corporation and one or more other senior executives, have the same fiduciary duty to the corporation as independent directors. This fiduciary obligation may put inside directors in the uncomfortable position of having to resist the wishes of a controlling shareholder. Although corporate statutes and courts pay considerable attention to the participation of outside directors in board matters because of their objectivity and independence, this focus on outside directors does not diminish the obligation of inside directors to adhere to the same fiduciary standards.

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(b) Care, Diligence and Skill
In discharging their duties, directors must "exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances". In Canada, directors cannot contract out of these responsibilities and may be personally liable for any breach of these duties. The requirement that directors exercise the care, diligence and skill of a reasonably prudent person is a general principle which appears vague, but becomes clearer in the context of how directors are expected to act in particular circumstances. Each of the three elements � care, diligence and skill � has significance. The standard can be achieved by any director who devotes reasonable time and attention to the affairs of the corporation and exercises informed business judgment.
The standard of care is measured against the objective standard of what a reasonably prudent person would do in comparable circumstances. This requires directors to devote the necessary time and attention to be able to bring their own judgment to bear on the matter and make an informed decision. A notable example of a board which failed to meet this standard of care was the board of Trans Union Corporation. In the leading U.S. case of Smith vs. Van Gorkum, this board's conduct in considering a merger led the court to conclude that the directors had been grossly negligent and were, therefore, personally liable. The Trans Union board met and approved a merger proposal after a twenty-minute presentation and a two-hour discussion. The directors had no prior notice that the meeting would be considering the proposed merger and had not informed themselves about how the merger price had been determined or about the intrinsic value of the corporation. Furthermore, the board did not request or receive any legal advice or a fairness opinion, nor did it consider or reserve the right to solicit higher offers.
Directors may find that the standard of care will be applied more strictly in certain situations. The American courts have referred to a heightened duty of care in the context of certain transactions, such as a management buy-out with its attendant self-interest. In Canada, too, boards have recognized the need to act with particular care in such circumstances by appointing special committees of directors to scrutinize the transaction. In applying the standard of care, the courts' concern has been primarily, but not exclusively, one of process rather than result. If the directors have sufficient information concerning the issue before them, examine the information critically and take the time to make an informed decision, the courts are reluctant to interfere with the result. If the directors make a decision which may be debatable from a business perspective, or if the matter simply turns out badly, the courts will not normally criticize the directors. This broad principle is sometimes referred to as the "business judgment rule", discussed below. On the other hand, directors may find themselves liable for failing to meet their standard of care if there is evidence that they did not give sufficient thought to the decision or were otherwise not diligent.
The diligence directors must exhibit in discharging their duties does not mean they will be liable for every error. Rather, they must discharge their duties with the same diligence as a reasonably prudent person would use in comparable circumstances. Failure to meet the standard often stems from a failure to inquire. It is usually not sufficient for directors to rely on their personal knowledge of the corporation instead of detailed information about the matter before them. Directors must ask for, and are entitled to receive, all the information they believe necessary to make careful decisions. Diligence requires actively questioning management and advisors, as well as engaging experts where necessary and carefully reviewing their reports. Directors who ask questions and are misled or misinformed will still have acted diligently if it was reasonable for them to expect that they could rely on the responses. Behaving diligently provides directors with a defence to liability under many statutes. Directors are also entitled to dissent from any decision of the board and to have that dissent recorded. Under many statutes, this will relieve the director of any liability for the results of that decision.

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The skill which directors must exercise in discharging their duties is that of a reasonably prudent person. There is no requirement for a director to have any particular level of education, experience or professional designation. However, directors must employ whatever ability, education, experience and training they do possess in the manner in which a reasonably prudent person would employ those skills in comparable circumstances.
This is not to suggest that professionals who serve on boards of directors are required to provide professional advice. For example, the role of a lawyer on a board is to offer business advice and judgment, not to give legal advice. Such advice should properly be provided by counsel to the corporation who is an expert in the relevant area of law. However, lawyers who are directors may not ignore legal issues which they recognize, or fail to use their legal training to question closely the legal advice given by the corporation's counsel.
Inside directors and directors who serve on committees of the board are faced with similar concerns. These directors will be better informed about some aspects of the corporation's affairs, and this knowledge must be applied in testing management's recommendations and reaching decisions about the corporation's affairs.
In its consideration of the Standard Trustco case, the Ontario Securities Commission, a regulatory body which has asserted the right to review directors' conduct in some circumstances, stated that directors who were members of the audit committee should bear somewhat more responsibility than other directors for a compliance deficiency in the corporation's financial statements. This increased responsibility arose not because the members of the audit committee were subject to a greater standard of care, but because they had more opportunity to obtain knowledge about and to examine the affairs of the corporation than did other directors. As a result, the Ontario Securities Commission decided that more was expected of them in overseeing the financial reporting process and warning other directors about problems.
(c) Business Judgment
American courts have developed a presumption that directors have acted properly in making a business decision if they acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the corporation, and without fraud or self-dealing. If the party challenging a board's decision rebuts any element of the presumption, the directors must prove the fairness of their decision. The result is that U.S. courts do not interfere when the directors have made careful, informed decisions. Further, they assume directors have done so until the contrary is proven.
Although they have not specifically adopted the U.S. business judgment rule, Canadian courts have reached much the same result. The KeepRite case is a good example of how a court may review a business decision by a board of directors, but will not interfere with it if the decision was properly made and was not oppressive. In that case, minority shareholders challenged the corporation's decision to acquire assets from one of its subsidiaries. An independent committee of the board had concluded that the decision was fair to the corporation asa whole, including the minority shareholders. The court placed a great deal of weight on the process by which the board came to its decision and in particular took into account the fact that the matter had been considered by an independent committee of the board. The court consequently found no reason to question the business judgment of the directors. The trial judge, supported by the Court of Appeal, stated:
Business decisions, honestly made, should not be subjected to microscopic examination. There should be no interference simply because a decision is unpopular with the minority.
A recent Ontario case demonstrating a court's deference to the directors' business judgment is Benson v. Third Canadian.

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When reviewing the merits of a board's business decision, a court may ask whether the directors had an honest belief, on reasonable grounds, that the transaction in question was in the best interests of the corporation. In other words, there must have been a legitimate business purpose for the transaction. Some courts have understandably required more than a mere assertion of good faith on the directors' part. If challenged, directors will likely be required to demonstrate that they considered and based their actions on what they truly believed were the best interests of the corporation.
The Canadian business judgment rule does not offer quite the same protection as its American counterpart largely because of the availability in Canada of the oppression remedy which is available whether or not a board follows the proper process in making a decision. This remedy is available to shareholders, creditors and others who can show that a board's decision is oppressive or unfairly prejudicial to or unfairly disregards their interests. In determining whether a particular decision of a board was oppressive, the court must necessarily evaluate the business decision made by the board.
In the case of Palmer v. Carling O'Keefe, Carling O'Keefe amalgamated with a company established by Elders to acquire Carling O'Keefe. The court was asked to consider the impact of the amalgamation on the holders of the preference shares of Carling O'Keefe. The object of amalgamating the two companies was to move the debt incurred to make the acquisition into Carling O'Keefe. In order to protect the interests of the preference shareholders, sufficient funds to redeem the preference shares were set aside in a separate trust account. The court decided that the transaction had no business purpose for Carling O'Keefe. It concluded that the transaction was unfairly prejudicial to, and unfairly disregarded the interests of, the preference shareholders and that the directors of Carling O'Keefe had breached their duty to act for the benefit of the corporation as a whole. The oppression remedy is discussed in greater detail in Section 5 of this part of the guide.
3. To Whom are Directors Accountable?
Directors are required by corporate statutes to discharge their duties "with a view to the best interests of the corporation". Traditionally, this phrase has been interpreted to extend only to the corporation as a whole. However, in reaching many decisions, directors will be confronted with a number of competing interests, in addition to those of the corporation. In recent years, Canadian courts have been prepared to give directors more scope in considering the interests of different persons affected by corporate acts. The courts recognize that acting with a view to the best interests of the corporation does not mean that directors must disregard the interests of other parties or "stakeholders" who may be affected by the actions of the corporation. Stakeholders include a corporation's shareholders, but may also include its employees and creditors, and the community or country in which the corporation carries on business. Nevertheless, directors may not act contrary to the interests of the corporation in order to advance the interests of a stakeholder.
Some statutes may impose other types of accountability on the entities they regulate. Ontario's loan and trust legislation, for example, requires directors to have due regard to the interests of the depositors and the persons for whom the corporation acts in a fiduciary capacity, as well as the interests of the shareholders, in considering whether a particular course of action is in the best interests of the corporation as a whole. Directors of these corporations must, therefore, take these interests into account, and may also consider the interests of the other stakeholders in formulating a course of action.
(a) Interests of the Shareholders
The KeepRite decision is representative of Canadian cases stating that directors owe a duty to the corporation and not its shareholders. However, if a shareholder believes that the actions of the corporation have been unfairly prejudicial to its interests, it has recourse to the oppression remedy described below. In many

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instances the distinction is not significant, since what is good for the corporation will also benefit its shareholders. Maximizing the return to shareholders is also in many cases consistent with the best interests of the corporation.
Nevertheless, there can be instances where the interests of the corporation and its shareholders diverge. The interests of the common shareholders may be in realizing a short-term gain on their investment, a goal which the directors may conclude is not necessarily in the long-term best interests of the corporation. In the situation of a take-over bid, discussed in greater detail in Part III, it is not clear whether the directors have an obligation to maximize the return to shareholders by ensuring that shareholders receive the highest possible price for their shares. Further, the interests of the majority shareholders may not be the same in every case as the interests of the corporation. For instance, a controlling shareholder may want the corporation to take certain action which may be in its interest, but not necessarily in the best interests of the corporation. Developing the right solution to these kinds of issues will depend very much on the facts of each case.
(b) Interests of Other Stakeholders
Directors recognize that their decisions have an impact beyond the corporation and its shareholders. Employees and the community will be affected by a decision to close a plant. Debentureholders may be affected by high-risk business strategies or by corporate reorganizations. The national interest may be affected by a decision to move operations offshore. Directors may feel a responsibility to consider the interests of these stakeholders. The modern interpretation of a director's duty to the corporation permits directors to consider these interests in coming to a decision about what is in the best interests of the corporation. In its judgment in Teck, the Supreme Court of British Columbia confirmed that directors could consider interests other than those of the corporation:
If today the directors of a company were to consider the interests of its employees, no one would argue that in doing so they were not acting bona fide in the interests of the company itself. Similarly, if the directors were to consider the consequences to the community of any policy that the company intended to pursue, and were deflected in their commitment to that policy as a result, it could not be said that they had not considered bona fide the interests of the shareholders.
Certain American jurisdictions have statutes permitting directors to consider interests other than those of the corporation or the shareholders as a whole. Some states permit (and, in circumstances such as take-over bids, require) directors to consider the interests of employees, suppliers, creditors and consumers. Some states include local and national economies and society as a whole in the interests to be considered. Suchlegislation was enacted in the wake of high levels of take-over activity in the 1980's (particularly by non-Americans) and was, at least in part, a response to decisions facing boards of directors which had significant implications for stakeholders of the corporation other than shareholders. At present, there is no equivalent Canadian legislation.
4. Reliance on Management, Financial Statements and Advisors
In discharging their responsibilities directors are not expected to have first hand knowledge of all aspects of the affairs of the corporation. The board delegates to management and is entitled to rely on the information prepared by management, including the financial statements. Similarly, directors are not required to be expert in technical areas of the corporation's business. They are entitled to rely on reports of internal or external experts, such as lawyers, accountants and appraisers.

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(a) Reliance on Management
The law recognizes that since directors must delegate much of their responsibility to the corporation's management and since directors are dependent on management for virtually all of the information they have about the corporation, the directors must be entitled to rely on management and what it tells them, when it is reasonable to do so. Directors may assume that the officers have performed their duties honestly, but only if they have no grounds for suspecting otherwise. The Ontario Securities Commission's Standard Trustco decision emphasized that directors should not rely on management unquestioningly where they have reason to be concerned about the integrity or ability of management or where they have reasonable grounds for doubting management's ability to make objective recommendations to the board on a particular issue. In those circumstances, directors must ensure that they are justified in relying on the information being provided to them.
(b) Reliance on Financial Statements
Many of the decisions made by a board of directors are based on a particular understanding of the financial condition of the corporation. In assessing the corporation's financial condition, directors are dependent not only on the integrity of the internal financial systems, but also on management which prepares the financial information or statements, and on the auditors who review that process and the statements. The role of the board of directors in ensuring that the financial statements are accurate is discussed in Part II.
Directors are entitled under the corporate statutes to rely on the financial statements under two conditions. First, they must rely on the statements in good faith. Second, the financial statements must have been represented to the directors to fairly reflect the financial condition of the corporation, either by an officer of the corporation or in a written report of the auditor of the corporation. If these conditions are met, directors who rely on the financial statements in reaching their decision are specifically exempted under the corporate statutes from liability for a number of breaches of those statutes, including liability for employee wages, and even from liability for breach of their fiduciary duty.
(c) Reliance on Advisors
Just as they are entitled to rely on the financial statements of the corporation, directors are entitled to rely on the corporation's advisors and will avoid certain liability under the corporate statutes for actions taken in reliance on these advisors. Again, this reliance must be in good faith. Moreover, directors may only rely on a report of a person "whose profession lends credibility" to the statements made by that person. Lawyers, accountants, engineers and appraisers are examples given in the statute, but other types of financial advisors as well as environmental consultants can also be included in this category. An Ontario court recently confirmed the propriety of a board's actions taken on legal advice in Benson v. Third Canadian.
Directors should confirm that the expert or advisor is qualified to give the advice sought and that the expert or advisor had access to and considered the information relevant to the advice. Directors may not be entitled to rely on other directors with expertise in a given area unless the director is specifically retained for that purpose. Reliance on the views of a lawyer on the board, for example, will not provide directors with a defence unless that lawyer is also retained as counsel.
It is incumbent upon the directors to question outside advisors closely on their advice. In one American decision, for example, the court found that it was not sufficient for directors to rely on a conclusory oral opinion of the corporation's investment bankers about whether the option price for certain assets was within a range of fair value. The directors did not require a written fairness opinion, nor did they inquire what the range was or about the effect of the transaction on the corporation's future.

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In some situations, the board must hear directly from outside advisors rather than delegate responsibility for seeking outside advice to management. This may be the case, for example, where the issue is a material one to the corporation or where management may have some interest in the advice being given. In some cases, it may even be appropriate for the directors to hear from and question the advisors in the absence of management.
Finally, the TSE Corporate Governance Committee suggested that every board of directors should implement a system to enable an individual director, subject to appropriate board committee approval, to engage an outside advisor at the corporation's expense in appropriate circumstances. The Committee recognized that individual directors may wish to dissent from a board decision, may believe that the direction the board is taking is wrong, or may otherwise be concerned about their personal liability for corporate actions and may, therefore, need to consult with independent legal, financial or other advisors.
5. Taking Action Against the Directors
The corporate statutes provide several ways for shareholders and other interested parties to take action against directors. The first is the oppression remedy, available to parties who believe they have been unfairly dealt with by a corporation. The second is the derivative action, which allows a third party to require the corporation to take action against the directors. Finally, a third party may apply to the court for an order compelling the directors to comply with the corporation's articles, by-laws or governing statute.
(a) Oppression
The oppression remedy is a very broad remedy available to a complainant where the corporation or the board has acted in a manner which was oppressive or unfairly prejudicial to, or which unfairly disregarded that person's interests. A complainant may be a current or former security holder, creditor, director or officer of the corporation or any of its affiliates, or any other person who the court agrees is a proper person to bring an oppression action. The oppression remedy permits parties to protest corporate action which they consider unfair. If a court finds oppression, it may make any order it considers appropriate to remedy an oppressive or unfair situation.
The corporate statutes do not provide any objective definition of oppression, but the courts have developed a list which, though not exhaustive, provides some guidance about what constitutes oppressive behaviour:
€ lack of a valid corporate purpose for a transaction;
€ lack of good faith on the part of the directors of a corporation;
€ discrimination between shareholders that benefits the majority shareholder to the exclusion or detriment of the minority shareholder;
€ lack of adequate and appropriate disclosure of material information to minority shareholders; and
€ conflict of interest between the interests of the corporation and the personal interests of one or more directors.
As discussed above, the oppression remedy is particularly important for directors because their decisions may be censured if the court finds them oppressive or unfairly prejudicial, even though, in some instances, the court may also find that the directors acted in accordance with the law, the articles and by-laws of the corporation and their fiduciary duties. There need not be evidence of bad faith on the part of directors for a finding of oppression. While a court will consider the integrity of the process by which the transaction was approved and undertaken, it will also consider the substantive effects of the transaction on the complainant.

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In the Westfair Foods Ltd. case, the directors approved the payment of dividends, constituting all the earnings of the corporation, to the holder of all the corporation's common shares. That shareholder then loaned the money back to the corporation. Both the payment of dividends and the borrowing of money was within the power of the directors, and the court did not find that these powers were exercised improperly or that the court was entitled to question the business decision to pay out dividends and then finance expansion by borrowing. The court did, however, find that in the circumstances the procedure adopted by the board exemplified an unfair disregard for the interests of the other shareholders who were entitled only to fixed dividends, but who shared rateably with the common shareholder on liquidation. This is also an example of what has become characterized as a related party transaction. Such transactions may require particular procedures to be followed by the board to assist in being able to demonstrate that it acted in good faith.
In Palmer v. Carling O'Keefe, discussed above, the court found that there was no bad faith involved in the decision to amalgamate the two companies, and that the board, composed of experienced business people acting upon independent advice, had exercised its best business judgment with respect to the transaction. The court concluded that the impugned conduct nevertheless constituted oppression because it was unfairly prejudicial to the interests of the holders of preference shares and because it did not serve the interests of the corporation, only the interests of the controlling shareholder.
(b) Derivative Action
There may be circumstances in which a shareholder or creditor wishes to seek redress on behalf of the corporation for the directors' breach of the corporation's rights. Since the shareholder or creditor would not be considered an aggrieved party, it could not bring an action without the mechanism described below. For example, where the directors have breached their fiduciary duty to the corporation, a shareholder could arguably not launch a suit since the fiduciary duty is owed to the corporation and not the shareholder. However, the shareholder may still be able to sue the directors on behalf of the corporation by way of a derivative action.
A court will not give a complainant leave to bring an action unless the complainant first gives the directors reasonable notice of its intention to bring a derivative action and the directors do not cause the corporation to bring and diligently prosecute the action. The court must further be satisfied that the complainant is acting in good faith and in the best interests of the corporation.
The derivative action is used far less extensively than the oppression remedy, in part because a successful derivative action may result in an award of damages or other remedy to the corporation, whereas an oppression action may result in an award to the complainant.
(c) Compliance Orders
If a corporation or a director, officer, employee or agent of the corporation breaches its governing corporate statute or the articles, by-laws or a unanimous shareholder agreement of the corporation, a complainant may apply to a court for an order directing compliance or restraining the breach. Most often petitions for compliance orders are coupled with oppression actions, and the judgments have tended to be based on oppression rather than compliance.

ood corporate governance is integral to directors discharging their responsibilities. In a general sense, "corporate governance" refers to the process and procedures used to manage the business and affairs of a corporation. It relates to internal matters such as the operation of the board as well as external matters such as the corporation's relationship and dealings with shareholders.
For the purpose of its report, the TSE Corporate Governance Committee defined corporate governance as the process and structure used to direct and manage the business and affairs of the corporation with the objective of enhancing shareholder value, which includes ensuring the financial viability of the business. The process and structure define the division of power and establish mechanisms for achieving accountability among shareholders, the board of directors and management. The direction and management of the business should take into account the impact on other stakeholders such as employees, customers, suppliers and communities. One of the principal themes of the TSE Report is the empowerment of individual directors. The TSE Report states that effective corporate governance requires every board of directors to have in place appropriate structures and procedures to ensure that the board can function independently of management.
The way in which corporate governance issues are handled depends on the corporation in question and its circumstances at the time an issue is being considered. Some general guidelines for dealing with these issues can be distilled from the corporate statutes, the case law and the evolving standard of good practice that has developed in Canada and elsewhere. This part describes corporate governance issues and outlines certain guidelines for dealing with them.
1. Membership of the Board
(a) Number of Directors
The size of a board is dictated by the needs of the corporation and norms developed in certain industries. A board should have enough directors to represent a variety of skills and perspectives and to provide experience useful to the board in managing the corporation. It may also be necessary or desirable to represent a number of constituencies on the board � for example, representatives from different provinces, industries or shareholder groups. There must be enough directors to serve on various committees of the board without overburdening any individual director or making it impossible for directors to discharge their responsibilities. However, a board should not be so large that its meetings become unwieldy. There may also be a danger of individual directors losing their sense of direct responsibility if they are part of a very large board

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where they do not have sufficient opportunity to make the contribution they feel is appropriate.
According to Conference Board of Canada studies, boards of Canadian corporations average 12 members, two of whom are normally inside directors, that is officers of the corporation or an affiliate. Boards of foreign-owned subsidiaries tend to be smaller than those of Canadian-controlled corporations. Boards of public companies tend to be larger than boards of private companies. Boards of the major banks tend to be very large, with as many as 30 or more directors.
The TSE Committee's Final Report expressed some concern about the size of many boards. Its Guidelines suggest that every board of directors should examine its size with a view to determining the impact of size upon effectiveness and, where appropriate, put in place a program to reduce the number of directors to a size that facilitates effective decision-making. A number of institutional investors have issued proxy guidelines that state that they are of the view that boards of public companies should not typically be comprised of more than 15 or 16 directors.
(b) The Independent Director
Most boards have a combination of "inside" and "independent" or "outside" directors. Independent directors and the role they play has recently received increased attention from those concerned with accountability in corporate governance. The corporate statutes define an independent director as any director who is not employed by the corporation or one of its affiliates. Under this definition, a variety of persons, including retired employees of the corporation and representatives of a controlling shareholder, major creditors, customers or suppliers of the corporation would qualify as independent directors, notwithstanding their potential conflicts of interest. Further, the term "affiliates" involves the concept of control and, therefore, directors or employees of a major, but not controlling, shareholder are technically independent under the corporate statutes.
In practice, the meaning of the term "independent director" is different than the definition in the corporate statutes. Determining whether a director is independent involves a consideration of whether there is a material connection between the director and the corporation which could hamper the director's ability to make objective judgments. Any relationship between a director and the corporation � past, present or anticipated � could compromise at least the perception of that director's independence if not that director's actual independence. It can be difficult to judge when this somewhat intangible line is crossed; but whether or not a particular director is independent in fact, the perception that a director is independent is important to shareholder confidence and to a court's review of the procedural aspects of a board's decision. For these reasons, the practice of a number of public companies, influenced in part by securities regulation policies, is to narrow the class of persons considered to be independent directors.
The Canada Business Corporations Act requires public companies to have no fewer than 3 directors, 2 of whom must be independent directors. On a board of 12, then, a CBCA corporation could legally have 10 inside directors. Other statutes are more restrictive. For example, Ontario's Business Corporations Act requires that at least one-third of the directors of a public corporation not be officers or employees of the corporation or any of its affiliates. The Bank Act requires that at least one-third of the directors have no affiliation with the bank. The number of bank employees who may sit on the board is also limited.
In recognition of the importance of independence in the corporate governance process, the TSE Report focused on this issue. The Report introduced a new concept of "unrelated" directors. These are directors who are free from any interest and any business or other relationships (other than interests and relationships arising from shareholding) which could, or could reasonably be perceived to, materially interfere with the directors' ability to act with a view to the best interests of the corporation. One of the most significant recommendations that

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the TSE Corporate Governance Committee put forward was that every corporation should constitute its board of directors with a majority of individuals who qualify as unrelated directors. In proposing this Guideline, the Committee indicated that it was responding to the concern that the board be able to bring objective judgment to the assessment of management and to the assessment of the merits of management initiatives.
The TSE Corporate Governance Committee also addressed the constraints on individual director's decision-making which can sometimes result when board members are related to the corporation's significant shareholder. For purposes of the TSE Report, a significant shareholder is deemed to be a shareholder with the ability to exercise a majority of the votes for the election of the board of directors. While the Committee accepted a significant shareholding should not, in itself, make directors related, the Committee's Guidelines recommend that the boards of companies that have a significant shareholder should also include a number of directors who do not have interests in or relationships with either the corporation or the significant shareholder and who fairly reflect the investment that shareholders other than the significant shareholder have in the corporation. This is a change from the Committee's initial draft report which recommended that a significant shareholder should be considered related. Although some people believed it was time to have a general rule that boards have a majority of unrelated directors on this broader basis, the Committee adopted the current Guideline based on extensive public comment.
Increasing the number and responsibilities of independent directors has become an accepted way of addressing many corporate governance issues. Independent directors are perceived to be in a better position than inside directors to make objective decisions and to assess management recommendations because they have less personal interest in those decisions and recommendations.
(c) Chair
Most boards appoint a chair who is responsible, among other things, for managing the board, setting the agenda, ensuring that directors are kept informed and running the meetings. In many corporations, the chief executive officer is also the chair. Other corporations prefer to have an independent director chair the board. In some cases, this may assist the board to function more independently from management because, for example, the chair can control the agenda for board meetings. The chair is a key liaison between the board and senior management. Increased concern about board accountability and process have made the separation of these two functions the subject of greater debate.
The Cadbury Report on corporate governance, released in Britain in December 1992, recommends a clear division of responsibilities between the chief executive officer and the board chair to ensure a balance of power and authority and to prevent any one individual from having unfettered powers. In Canada, the conventional view had been that the separation of the two functions, while desirable, is somewhat less critical than in Britain where boards have tended to have fewer independent directors than Canadian boards, making the separation of functions more important in establishing checks and balances.
The TSE Report stressed the importance of the board's ability to function independently of management. The TSE Corporate Governance Committee suggested that the simplest means for so empowering board members would be through the appointment of a non-executive chair of the board. The Committee expressed a preference for the appointment of a non-executive chair, but stopped short of elevating this preference to the status of a Guideline. The Committee recognized that alternative structures such as assigning this responsibility to a board committee or to an independent "lead director", could achieve the same objective, namely enabling the board to function effectively independently of management.

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Various institutional investors have issued guidelines recommending that the position of chair of the board and chief executive officer be separated.
(d) Qualification
Convincing qualified candidates to serve on a board of directors can be difficult. In part, this is because of the time commitment involved. Recently, directors have become more concerned about the potential personal liability they assume when they agree to serve on a board, as illustrated by the publicity surrounding the resignation of directors from the boards of a number of companies in financial difficulty.
The corporate statutes impose minimal qualifications for directors. Any individual who is 18 or over, who has not been found by a Canadian court to be of unsound mind and who does not have the status of a bankrupt, is qualified to be a director of a Canadian corporation. Where a director has been convicted of certain offences, a court or a regulatory authority may prohibit that person from serving as a director for a period of time.
Although no longer common practice, the articles of a corporation may require directors to hold shares of the corporation. However, since the shareholdings of directors are required to be set out in certain documentation provided to shareholders, it is considered good form in some public companies for directors to hold shares to demonstrate confidence and interest in the corporation and its management.
A majority of directors must be resident Canadians, and some provinces require that one or more directors of a corporation governed by the provincial corporate statute be resident in the province. As discussed above, a specified number of directors must be independent directors if any of the corporation's securities are publicly held.

Corporations look for a number of qualities in their independent directors. Experience and judgment are foremost among those qualities. Independent directors are often successful business people, with experience which either spans a number of industries or is in an area relevant to the corporation. They may also be from government, politics or academia, depending on the needs and interests of the corporation. Although directors are not expected to have the expertise necessary to directly manage the business themselves, it is important that some, if not most, have some background in the issues which the corporation faces. Directors may be professionals such as lawyers, although advisors to the corporation will need to consider carefully whether they should serve on the board of a corporation which they advise. The practice varies. Some corporations prefer no member of the firm which acts as the corporation's outside counsel be on the board. Others require that other lawyers in the firm and not the lawyer who is the director give legal advice to the corporation and its directors. In some instances, this distinction is not made and lawyers serve as directors and give legal advice to the corporation.
Since the Canadian business community is comparatively small, most board appointees are recommended by other directors or by senior officers of the corporation. There are also several executive search firms which assist in locating and selecting new board appointees, particularly where the corporation wishes to have a special constituency represented on the board.
One issue is the role of senior management in selecting board members. Again, the goal is to create a balance between management and the board in managing the corporation. It is common for a board to appoint a nominating committee to select appropriate candidates.
The TSE Report recommended that nominating committees be composed exclusively of non-management directors with the responsibility not only for proposing new nominees, but also for assessing directors on an ongoing basis.

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Institutional investors have also endorsed the proposition that there be a nominating committee composed of non-management directors.
As an important element for new directors, the TSE Corporate Governance Committee also recommended that every corporation provide an orientation and education program for new recruits to the board. Such a program could be a one or two-day event which would familiarize the director with the nature of the business, current issues within the company, the corporation's strategy,the company's expectations concerning input from directors, and directors' general responsibilities. The Committee suggested that such a program should also include the opportunity to discuss with experts a director's responsibilities and those of the board as a whole, as well as the opportunity to visit facilities and to meet with corporate officers in order to develop a better appreciation for the business. The Committee was of the view that these measures would allow directors to contribute effectively from the outset of their appointment.
(e) Election and Term
Normally directors are elected by a simple majority of shareholders at the annual meeting. The slate of directors is put forward by the corporation in the management information circular which is approved by the directors and which must accompany the proxy form sent to shareholders for the annual meeting. Shareholders typically vote for (or withhold votes from) the proposed slate of directors rather than vote for or against individual candidates, although the proxy form also provides an opportunity for shareholders to cross out names if they wish to withhold their vote from a particular director. While it is open to the shareholders to nominate persons at the annual meeting, in practice this seldom happens. If it does, such person is rarely elected because the proxy procedures usually result in the majority of votes being given to management and, therefore, being voted in favour of the proposed slate. Further, in many Canadian corporations, there is a controlling or majority shareholder which will effectively elect the proposed slate.
The articles of a corporation may provide for cumulative voting for directors. In this case the articles must provide for a fixed number of directors rather than simply stipulating a minimum and a maximum number, which is permitted where there is no cumulative voting. Cumulative voting entitles each shareholder to cast one vote for each share held, multiplied by the number of directors to be elected. By casting all of these votes in favour of one candidate, a shareholder (or a group of shareholders) with sufficient voting shares will be able to elect at least one director, even though the shareholder does not control a majority of the votes. This helps shareholders, particularly minority shareholders, to elect directors representative of their interests in proportion to the percentage of the voting shares they control. However, very few corporations have adopted cumulative voting.
The articles of a corporation may also provide for a particular class of security holders, such as preferred shareholders, to elect one or more directors. For the most part, however, these shareholders only have the right to elect a representative if there has been some unusual event, such as the corporation's failure to pay dividends on preferred shares for a specific period.
Agreements among major shareholders may also affect the election of directors. Shareholders sometimes agree to support each other's nominees for election to the board, usually in proportion to their overall shareholdings. Occasionally, majority shareholders may also agree to support one or more representatives of the minority shareholders.
Directors may be elected for terms of up to three years, although it is more common for directors to be elected each year by the shareholders at the annual meeting. Directors need not all be elected at the same time or for the same length of time, but may be elected for staggered terms.

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Surveys show that directors tend to serve for a number of terms. Most directors serve for at least five years and many serve for 10 years or more. Many corporations have compulsory retirement for their directors. Where there is no particular retirement age, directors tend to retire at about age 70.
(f) Remuneration
Directors' remuneration is usually set by the board. Independent directors are normally paid an annual fee along with a certain amount for each board meeting or committee meeting they attend. According to published surveys, annual fees paid to directors in Canada average about $10,000 per year and the fee paid per board meeting averages about $800 per meeting, plus travel expenses. An average additional per meeting fee of $200 to $300 (or, in many public corporations, the same amount as for full board meetings) may be paid to members of board committees for each committee meeting they attend, and an additional annual amount averaging $3,000 to $4,000 may be paid to the chairs of those committees. These average amounts tend to be somewhat lower than the amounts paid by many Canadian public companies and lower still than fees paid to directors of American corporations. Inside directors are not normally remunerated separately for their service on the board. Amounts for directors' fees are being reconsidered by corporations in view of the time spent by conscientious directors on the affairs of the corporation and, in particular, the potential liability to which they are exposed. However, increased remuneration may lead to a perception of diminished independence if fees are seen as the main reason for individuals wishing to serve on a board.
The TSE Report expressed concern about the increasing risk associated with being a director as corporate and di

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