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Directors’ responsibilities and composition of the board

Directors’ responsibilities and composition of the board

The corporate governance aberrations witnessed lately have led to a tightening of the rules governing the responsibilities of directors and of the rules pertaining to the composition of corporate boards and how they must function. The following text is a summation of those rules.

Responsibilities of directors

The nature of the obligations incumbent upon the members of a board of directors can be broken down as follows:

• Directors are bound to act at all times in good faith, prudently and diligently, and in the best interests of the corporation. It goes without saying they cannot put their own personal interests, or those of related persons, ahead of those of the corporation.

• Directors have a fiduciary obligation toward all of the corporation’s stakeholders, which means they must act for the latter’s exclusive benefit. They are thus not only responsible for the management of the corporation but are accountable to its employees, shareholders and even its suppliers and partners.

• Directors have a positive obligation when it comes to the management and supervision of the affairs of the corporation. They must inform themselves before making a decision.

• Directors must act within the limits of the powers afforded them by law and by the corporation’s articles and bylaws. Compliance with the foregoing must be a constant concern.

• Directors must adhere to the highest ethical standards. They are duty-bound to attend meetings of the board and its committees and inquire into any situation that appears dubious or debatable.

• Decisions made by directors must be reasonable in light of all the circumstances and information available to them. Directors must never cast a vote without being satisfied they are fully informed on the issue to be decided and are acting in the best interests of the corporation.

Agreeing to serve as a director presupposes the ability to not only express a point of view with conviction but to rally around a different point of view when the latter is both reasonable and better serves the interests of the corporation.

The competency profile of the board of directors is essential to its effectiveness. Generally speaking, the competency profile will be adequate if the following criteria are met:

• Thorough knowledge of the corporation, its environment and risk profile.

• Comprehensive knowledge of the multiple facets of the corporation, including its business environment, legal and regulatory framework, financial aspects and the potential issues and challenges it may face.

An effective accountability system is also essential for good governance. Accountability and the rendering of accounts must be thorough and should be vetted by an external consultant. The board cannot be solely dependent upon the information provided it to it by senior corporate officers. The information it relies on must be objective, thorough, vetted and consistent. 

Governing involves foreseeing. Adequate risk management must be an integral part of a corporation’s governance program. In fact, risk management should be one of the board’s primary functions. Risks should be assessed comprehensively in order to take into account the ways in which they could potentially interact.

There are a number of ways to approach risk management. Perhaps the simplest is to divide the risks up into various categories, i.e. financial, operational, reputational and technological. Risk mitigation procedures are an inherent part of this approach.

Corporate management involves very significant legal, economic and ethical issues that require the individual involvement of all directors. What they must bring to the table can be summarized as follows: understanding the mission of the corporation and their role as directors, leadership and decision-making capabilities, analytical and deductive reasoning skills, probity and the ability to be an effective part of a collegial decision-making body.

Gabrielle Brochu is a partner with Langlois lawyers in Montreal.