Understanding Corporate Governance Canadian Corporate Counsel Association National Conference April 19, 2015 Matthew Merkley, Partner Blake, Cassels & Graydon LLP
Corporate Governance Topics of Discussion Qualifications, duties and liabilities of directors and officers Board conduct and delegation Examples of good governance practices Benefits of good governance practices Public and private company governance requirements Current regulatory developments 2
In general refers to: Corporate Governance: Meaning of the Term process and structure used to direct and manage the business and affairs of the corporation with the objective of enhancing corporate value ensuring the financial viability of the business division of power and establish mechanisms for achieving accountability Term is also used in the context of analysis of substantive business issues (i.e. disclosure, executive compensation) As a topic of discussion, very broad 3
Corporate Governance: General Comments A hot-button topic following failures in governance Current approaches to good governance arose out of: high profile governance and business failures of 2001-2002 (Enron, Worldcom, Adelphia, Global Crossing) financial crisis of 2007-2008 major recent proxy battles (CP Rail, Agrium) Good governance practices have significant benefits, but also costs 4
Corporate Governance: Sources of Requirements Corporate statutes and common law Securities legislation has a combination of mandatory requirements and voluntary guidelines Institutional investors and third parties also monitor and comment on governance of public companies ISS and Glass Lewis Canadian Coalition for Good Governance Ontario Teachers Pension Plan, CPP Investment board, etc. Globe & Mail ROB annual corporate governance rankings 26
Board of Directors General responsibility and composition (s.102 of CBCA): subject to any unanimous shareholder agreement, the directors shall manage or supervise the management of the business and affairs of the corporation distributing corporation at least three directors, at least two of whom are not officers or employees of the corporation or its affiliates 5
Board of Directors (cont.) Qualifications (s.105 of CBCA) following are disqualified from service as director: under 18 years of age; unsound mind; not an individual; and has the status of a bankrupt not required to hold shares in the corporation at least ¼ need to be Canadian residents (if less than four directors, one must be Canadian) 6
Board Conduct and Delegation S. 114 of CBCA and the corporation s articles, by-laws, unanimous shareholder agreements and mandates/charters Quorum must be present for a valid meeting Generally require ¼ of directors present to be Canadian residents Notice of meeting must specify significant enumerated matters Presence at meeting serves as waiver of notice 7
Board Conduct and Delegation (cont.) Telephone meeting permitted if all the directors consent or the by-laws provide Board may delegate authority to managing director or committee, other than items listed in s. 115(3) of CBCA: submit matter to shareholders for approval appoint directors issue or redeem securities declare dividends or approve commission for the sale of shares approve proxy circular, take-over bid circular or annual financials approve or amend by-laws 8
Board Conduct and Delegation (cont.) Note no Canadian residency requirement for committees in CBCA Saving provision for non-compliance and irregularities (s. 116 of CBCA) Unanimous written resolutions constitutes a meeting (s. 117(1) of CBCA) Copies of resolutions are kept in minutes (s. 117(2) of CBCA) Unless a ballot is demanded, an entry in minutes is proof (s. 117(3) of CBCA) 9
Duties and Liabilities of Directors and Officers Basis of corporate form is that ownership (shareholders) and management (board and officers) are separated Shareholders and other stakeholders must be able to trust that management is acting in the best interest of the corporation and attempting to manage the corporation competently Fiduciary relationship 10
Duties and Liabilities of Directors and Officers (cont.) Duty of care of directors and officers (s. 122(1) of CBCA): act honestly and in good faith with a view to the best interests of the corporation ; and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances Duty to comply (s. 122(2) of CBCA): with the CBCA and its regulations, as well as the company's articles, by-laws and any unanimous shareholder agreement No exculpation (s. 122(3) of CBCA): subject to any unanimous shareholder agreement, no contractual relief from duty to comply 11
Duty of Loyalty Duties and Liabilities of Directors and Officers (cont.) make decisions primarily for the corporation s benefit and not for benefit of director or officer note that the duty is to the corporation (BCE decision) where the corporation is ongoing, look to the long-term interests of the corporation may look at the interests of shareholders, employees, creditors, consumers, governments and the environment to inform decisions no principle that one set of interests (e.g., shareholders) should prevail over another set of interests 12
Duty of Care Duties and Liabilities of Directors and Officers (cont.) requires directors and officers to be diligent in supervising and managing the corporation s affairs objective standard Business Judgment Rule boards and corporate management have business expertise that courts do not courts are generally reluctant to substitute their own judgment if informed decision is within a range of reasonable alternatives 12
Duties and Liabilities of Directors and Officers (cont.) Examples of other sources of statutory liability: corporate law: unpaid wages, improper payment of dividends or share repurchases environmental liability (Environmental Protection Act, various other federal and provincial statutes) tax statutes: failure to remit income taxes or GST securities legislation: liability for misrepresentations in offering documents and continuous disclosure documents 18
Conflicts of Interest CBCA (s. 120) and common law prescribe procedures and practices Must disclose interest An interested director must generally abstain from voting, but exceptions exist May use a special committee of unconflicted directors. 18
Good Governance Practices No universal standard applicable to all corporations don t just check the box don t get bogged down by checklists Independent directors: independent directors more likely to have non-biased view of management decisions usually best for chairperson to be independent and not the CEO specific definitions of independence for public companies in National Instrument 52-110 super independence for audit committee members should hold meetings without management present 20
Good Governance Practices (cont.) Other aspects of board composition: balance of skills and experience (skills matrix) collegial environment open communication willingness to challenge turnover vs. experience and company knowledge age limits tenure limits regular assessment 21
Good Governance Practices (cont.) Board and committee mandates and position descriptions acknowledges responsibility for stewardship of corporation and responsibilities of individuals identifies process for independent decision-making Director orientation and education ensure directors know role of the board and their own individual roles continuing education is valuable to ensure directors maintain skill and knowledge 21
Good Governance Practices (cont.) Code of business conduct and ethics sets tone for honest and fair conduct in organization makes specific rules or guidelines to avoid conflicts of interest provides basis for whistle-blowers to report violations Compensation independent determination adequate compensation of board members compensation structure consistent with corporate goals Insider trading policy Disclosure policy 23
Board Committees Advantages more efficient and effective functioning of board allows focus for particular skills and interests provides for independent decision making; better monitoring of management Disadvantages adds complexity requires better information flow may remove important issues from the attention of the full board 24
Board Committees (cont.) Audit committees: required for distributing corporations (s. 171 of CBCA) not less than three members, a majority of whom are not officers or employees of the corporation or any of its affiliates must approve annual financials (and review annual MD&A) other public company requirements of audit committee include: generally, must be comprised solely of independent directors must review interim financials and interim MD&A must recommend to the board of directors: the nomination of the external auditor and the compensation of the auditor. must be directly responsible for overseeing the work of the auditor must pre-approve all non-audit services to be provided by auditor 25
Board Committees (cont.) Other common committees include: governance and nominating committee compensation committee ad hoc special committee 25
Key Benefits of Good Corporate Governance Practices Better-informed decisions generally Address liability concerns: reduce chances of bad decisions being made provide defences in court if something does go wrong Investor relations and stakeholder confidence Recruitment/peace of mind of directors and officers Greater long term corporate value? 19
Public Company Requirements Mandatory Requirements audit committee (CBCA and NI 52-110) comply or explain disclosure of corporate governance practices (NI 58-101) compensation disclosure (51-102F6) CEO/CFO financial statement certification (NI 52-109) civil liability (Parts XXIII and XXIII.1 of OSA) Toronto Stock Exchange (e.g., no slates, annual elections) Voluntary Guidelines corporate governance guidelines (NP 58-201) institutional investor/governance organization guides 27
Private Company Requirements Corporate statutes and common law Degree of specific governance procedures will be dictated by expectations of shareholders Benefits of good governance for public companies applies equally to private companies Weigh against costs of implementing procedures, additional organizational complexity 28
CBCA: 2013/2014 Consultation Industry Canada consultation undertaken to ensure that the governance framework for CBCA corporations remains effective, fosters competitiveness, supports investment and entrepreneurial activity, and instills investor and business confidence Mixed support in comments submitted
Majority Voting for Directors: TSX Amendments Effective June 30, 2014 Must adopt a majority voting policy (50% + 1 vote) describe majority voting policy in annual meeting circular only applies to uncontested meetings Unless otherwise satisfy the requirement (e.g., by applicable statute, articles, by-laws ) Majority controlled issuers are exempted 50% or more of the voting rights for the election of directors disclose in annual meeting circular: (i) reliance on exemption and (ii) reasons for not adopting majority voting
Majority Voting for Directors: TSX Amendments (cont d) Policy must, substantially, provide for the following: director to immediately tender resignation to the board if 50% board determines if to accept the resignation within 90 days board accepts the resignation absent exceptional circumstances resignation effective when accepted by board resigning director does not participate in any meeting of the board or committee at which the resignation is considered issuer promptly issues a news release disclosing the board's decision which, if the board determines not to accept a resignation, fully states the reasons for that decision
Gender Diversity: Why New 2015 Disclosure Requirements? Representation of women on FP500 boards 30 Source: Canadian Board Diversity Council 2014 Annual Report Card
Gender Diversity: Where Are We Now? Comply or explain regime Applicable: Non-venture issuers Not Alberta, B.C. and P.E.I., but TSX-listing = Ontario Filings following an issuer's financial year ending on or after December 31, 2014 31
Gender Diversity: Where Are We Now? (cont d) Disclose whether the issuer has adopted a written policy for identification and nomination of women directors and, if not, why not? Whether and if so how, the issuer considers the level of representation of women in the director identification and selection process and if not, why not? Whether and if so how, the issuer considers the level of representation of women in executive officer positions when making such appointments and if not, why not? 32
Gender Diversity: Where Are We Now? (cont d) Whether the issuer has adopted targets regarding women (i) on its board and (ii) in executive officer positions, and if not, why not? The number and percentage of directors of the issuer who are women. The number and percentage of executive officers of the issuer, including all major subsidiaries of the issuer, who are women. Whether there are director term limits or other mechanisms of board renewal and, if not, why not? 33
Gender Diversity: Where Are We Now? (cont d) OSC plans to review compliance after 3 years Other Canadian initiatives: Canadian Board Diversity Council (created in 2009) Quebec Crown Corporations (parity by Dec 2011) Catalyst Accord (launched March 2012) Women On Board Source (launched April 2012) CBCA Amendments Consultation (Dec 2013) Gov t of Canada Advisory Council Report (June 2014) 30% Club (2015 in Canada) 34
Selected Resources Ontario Securities Commission: www.osc.gov.on.ca Canadian Business Corporations Act: laws-lois.justice.gc.ca/eng/acts/c-44/index.html TSX Company Manual: tmx.complinet.com/en/tsx_manual.html Institutional Shareholder Services: www.issgovernance.com Canadian Coalition for Good Governance: www.ccgg.ca Blake, Cassels & Graydon LLP: www.blakes.com 32