Corporate Governance: What Directors Need to Know

The corporate scandals at Enron, Tyco, etc., have elevated the press coverage on corporate governance. These scandals seem to state a constant theme—it is becoming more difficult to find qualified individuals willing to sit as directors of corporations. If individuals contemplating joining a board read Carol Hansell’s book prior to accepting such a position, it would appear that this group of willing directors may become even smaller. While she likely was not trying to create an atmosphere of paranoia, when one reads of all the challenges, duties, obligations, potential liabilities and steps one might attempt to avoid liability as a director, accepting a position on a board is less attractive than it once was.

In What Directors Need to Know: Corporate Governance, Carol Hansell, a senior partner (corporate and securities law) at Davies Ward Phillips & Vineberg LLP in Toronto, provides a practical and understandable guide of the duties, responsibilities and liabilities of a director, written for directors. Hansell’s book is readable and does not suffer from being overly legalistic. Its style and structure make it well suited for its purpose. The book is divided into eight main parts with an appendix. Each part is subdivided and titled to make it easy to locate specific topics. Within particular sections, where required, there are cross-references to other sections.

Highlighted throughout each part are segments describing the best practices, current issues, recent developments (both in Canada and in the U.S.) and leading decisions. Legal decisions are analyzed in a comprehensible manner. Throughout the book, Hansell uses charts to illustrate the chain of authorities and flow of information between various components in the corporate governance structure and stakeholders, the board, management and advisors (i.e., auditors, etc.).

Part One reviews the role of directors from a legal or statutory perspective then describes the manner in which boards actually work in practice. It discusses the interplay between the roles and the responsibilities of management as they relate to the board of directors. Hansell also discusses elements required to be followed by boards of directors in making decisions and how directors should remain current with issues. Evaluation processes for the board and the determinations that should be made by an individual before joining a board are also discussed. This part also describes situations when directors should consider leaving a board.

The corporate existence and framework of accountability including the rights of shareholders by statute, bylaws, articles and shareholder agreements are discussed in Part Two. The overall role of the board of directors and an analysis of the difference between the management of it and the supervision of the management are detailed. Importantly, Hansell also reviews the tension that may arise between the board of directors and a controlling or major shareholder. Also described are the roles of auditors, both internal and external, and the disclosure rules and policies to be followed.

In Part Three, Hansell continues to discuss the working of a board. Of interest is her analysis of recent developments, including those in the U.S., relating to “independent” directors. The analysis of independence suggests that the practice of professional directors steering lucrative work to their firms, such as legal work, may be in jeopardy. The roles of committees including special committees are described, as are the roles of key individuals such as the chair, lead director and counsel.

Part Four reviews the standards of performance and the basic duties of a director from a statutory perspective. The fiduciary duty and the duty of care are described and analyzed in relationship to various stakeholders of a corporation. Contained in this part is also the business judgment rule as enunciated by the courts.

Unusual transactions or transactions outside the normal course of business including crisis situations and recommended responses are dealt with in Part Five. There is heavy reliance in this part, as would be expected, on general statements, with a caveat directing that boards seek outside advice.

Parts Six and Seven deal with liability issues and the manner in which directors may safeguard themselves. Liabilities such as statutory liabilities and liabilities in the event of insolvency are generally described in Part Six. Again the reader is advised to seek outside advice as there is a plethora of statutory provisions, which vary from province to province.

Part Seven describes indemnities that may be available or should be sought, including a general description of directors’ and officers’ liability insurance. As both of these subject matters are complex, the discussion is general in nature and the reader is counselled to seek advice.

The advice in this book is based specifically on the Canada Business Corporations Act. It should be noted that while a large number of provincial corporate statutes in Canada have evolved from this model, differences are inherent. The differences in corporate legislation could result in different conclusions in certain circumstances. Again in Part Eight, Hansell is quick to caution the reader. This caution also applies to a description of the applicable provincial securities acts. This part is particularly useful for its best practices and guidelines.

Carol Hansell’s book is excellent reading for any potential first time director and is a great reference for any board of directors. It will be invaluable to management of corporations, particularly management of corporations that are becoming public or are in a “pre-public” phase with outside directors. In addition, it is a good introdution for new lawyers and other professionals advising corporations. While it does not answer all questions, it certainly provides invaluable direction.