How to Navigate the Corporate Governance Landscape

Updated June 2012

This How-To Brief summarizes the corporate governance requirements and recommendations found in the Ontario Business Corporations Act (the "OBCA"), the Canada Business Corporations Act (the "CBCA") and the following regulations, rules, instruments, policies and forms promulgated under the Securities Act (the "SA"):

  • National Instrument 58-101, Disclosure of Corporate Governance Practices ("NI 58-101")); Form 58-101F1, Corporate Governance Disclosure; and Form 58-101F2, Corporate Governance Disclosure (Venture Issuers); and amendments to Form 51-102F6, Statement of Executive Compensation;
  • National Policy 58-201, Corporate Governance Guidelines ("NP 58-201");
  • National Instrument 52-110, Audit Committees ("NI 52-110"); Form 52-110F1, Audit Committee Information Required in an AIF; Form 52-110F2, Disclosure by Venture Issuers; and Companion Policy 52-110CPtoNI 52-110.

(See the links to these Acts and instruments in the Resources section of this How-To Brief.)

It should be noted that the Toronto Stock Exchange (the "TSX") provides listed issuers with suggestions for additional voluntary disclosure; however, it is beyond the scope of this How-To Brief to address such suggestions. If you are advising an issuer listed on the TSX or the TSX Venture Exchange, then you should consult the TSX Company Manual or the TSX Venture Policies, as applicable.

It should also be noted that on December 10, 2010, the Canadian Securities Administrators (the "CSA") approved "International Financial Reporting Standards"-related amendments to securities rules and policies. Additional changes include the CSA unofficially consolidating NI 52-110 and its companion policy on January 10, 2010, and approving amendments to Form 51-102F6 on August 15, 2011. While none of these amendments directly affect the interpretation of the aforementioned national instruments, readers are advised to continually monitor whether relevant revisions to the corporate governance regime have been implemented since publication of this How-To Brief.

1Rules that apply

The first step in determining the corporate governance requirements that apply to an entity is to determine the form of organization of the business:

  • If the entity is a corporation governed by the OBCA or the CBCA, then you must consult the OBCA or CBCA, as applicable. You will also need to determine whether the corporation is an offering corporation or a distributing corporation for the purpose of the OBCA or CBCA, as applicable (OBCA, ss. 1(1) and (6); CBCA, s. 2(1); Canada Business Corporations Regulations, 2001, SOR/2001-512, s. 2(1)).
  • If the entity is a partnership, then you must consult the agreement governing the partnership.
  • If the entity is a trust, then you must consult the declaration of trust governing the trust.

Regardless of the form of organization of the business, you must also determine whether the entity is a reporting issuer for purposes of the SA (SA, s. 1(1)) and, if so, whether the entity is a venture issuer (NI 58-101, s. 1.1; NI 52-110, s. 1.1). If the entity is a reporting issuer, then you must consult the SA and the regulations, rules, instruments, policies and forms promulgated thereunder.

Given the variety of corporate governance provisions that could be included in partnership agreements and declarations of trust, we have limited the scope of this brief to address those requirements applicable to corporations governed by the OBCA or CBCA as well as requirements applicable to reporting issuers set forth in the SA and the regulations, rules, instruments, policies and forms promulgated thereunder.

2Composition of the board of directors

A. Qualification of directors

OBCA/CBCA

Directors must be at least 18 years of age, of sound mind and not bankrupt (OBCA, s. 118(1); CBCA, s. 105(1)).

At least 25 per cent of the directors must be resident Canadians or, if the corporation has fewer than four directors, at least one director must be a resident Canadian (OBCA, s. 118(3); CBCA, s. 105(3)).

B. Number of directors

OBCA/CBCA

Corporations that do not offer securities to the public may have a single director (OBCA, s. 115(2)(a); CBCA, s. 102(2)). Corporations that are "offering corporations" under the OBCA or "distributing corporations" under the CBCA must have at least three directors (OBCA, s. 115(2)(b); CBCA, s. 102(2)).

Securities law

Section 3.12 of NP 58-201 recommends that the size of the board be established "with a view to facilitating effective decision-making."

C. Independence

OBCA/CBCA

The OBCA requires that one-third of the directors of an offering corporation not be employed by the corporation or any of its affiliates (OBCA, s. 115(3)). The CBCA requires that at least two of the directors of a distributing corporation not be employed by the corporation or any of its affiliates (CBCA, s. 102(2)).

Securities law

NP 58-201 recommends that the board have a majority of independent directors and that such directors hold regularly scheduled meetings at which non-independent directors and management are not in attendance (NP 58-201, ss. 3.1, 3.3). Section 3.2 of NP 58-201 recommends that the chair of the board be an independent director. Where this is not appropriate, an independent director should be appointed as lead director (NP 58-201, s. 3.2). Section 3.2 of NP 58-201also recommends that either an independent chair or an independent lead director act as the effective leader of the board.

Reporting issuers (excluding venture issuers) are required to disclose

  • the identity of directors who are independent
  • the identity of directors who are not independent and the basis for that determination
  • whether the majority of directors are independent and, if not, what the board does to facilitate the exercise of independent judgment in carrying out its responsibilities
  • whether any director is a director of any other reporting issuer (or the equivalent) and, if so, the identity of the other issuer
  • whether the independent directors hold regularly scheduled meetings at which non-independent directors and members of management are not in attendance and the number of such meetings; if no such meetings are held, what the board does to facilitate open and candid discussion among independent directors
  • whether the chair is an independent director and, if not, whether the board has a lead director; if there is no independent chair or independent lead director, what the board does to provide leadership for its independent directors
  • the attendance record of each director (NI 58-101, s. 2.1; 58-101F1, s. 1(a)–(g))

Venture issuers are subject to similar, albeit reduced, disclosure requirements under s. 2.2 of NI 58-101 and s. 1 of 58-101F2.

An individual is deemed to be "independent" if the individual "has no direct or indirect material relationship with the issuer" (NI 52-110, s. 1.4(1)). A material relationship is defined as a relationship that could, in the view of the issuer's board of directors, be reasonably expected to interfere with the individual's independent judgment (NI 52-110, s. 1.4(2)). Canadian securities regulators suggest that material relationships may include commercial, charitable, industrial, banking, consulting, legal, accounting or familial relationships or any other relationship that the board considers to be material (52-110CP, s. 3.1).

While the determination of whether a director is independent is generally a board decision under ss. 1.4(1)–(2) of NI 52-110, s. 1.4(3) lists certain individuals that are deemed to be not independent:

  • an individual who is, or within the prior three-year period has been, an employee or executive officer of the issuer
  • an individual whose immediate family member is, or within the prior three-year period has been, an executive officer of the issuer
  • an individual who is a partner or employee of the internal or external auditor of the issuer or who personally worked on the issuer's audit within the last three years as a partner or employee of that audit firm
  • an individual whose spouse, minor child or stepchild, or child or stepchild who shares a home with the individual, is a partner of the internal or external auditor of the issuer, is an employee of that audit firm's audit, assurance or tax compliance practice, or personally worked on the issuer's audit within the last three years as a partner or employee of that audit firm
  • an individual who is, or has been, or whose immediate family member is, or has been within the last three years, an executive officer of an entity if any of the issuer's current executive officers serves or served at the same time on that entity's compensation committee
  • an individual who received, or whose immediate family member who is employed as an executive officer of the issuer received, more than $75,000 in direct compensation from the issuer during any 12-month period within the last three years

Immediate family member is defined in s. 1.1 of NI 52-110 as an individual's spouse, parent, sibling, mother or father-in-law, son or daughter-in law, brother or sister-in-law and anyone who shares a home with the individual (other than employees of the individual).

D. Position descriptions

Securities law

Section 3.5 of NP 58-201 recommends that the board develop clear position descriptions for the chair of the board and the chair of each board committee. Reporting issuers (excluding venture issuers) are required to disclose whether the board has developed such position descriptions and, if not, to describe how the board delineates the role and responsibilities of each position (58-101F1, s. 3(a)).

Section 3.5 of NP 58-201 recommends that the board and CEO develop a clear position description for the CEO, including a delineation of management's responsibilities. The board should also develop or approve the corporate goals and objectives that the CEO is responsible for meeting (NP 58-201, s. 3.5). Reporting issuers (excluding venture issuers) are required to disclose whether the board and CEO have such a written position description and, if not, to describe how the board delineates the role and responsibilities of the CEO (58-101F1, s. 3(b)).

3Activities of the board of directors

A. Fiduciary duty/standard of care

OBCA/CBCA

In discharging their duties, directors must "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" (OBCA, s. 134(1); CBCA, s. 122(1)).

Generally speaking, directors cannot contract out of their fiduciary responsibilities and may be personally liable for any breach of these duties (OBCA, s. 134(3); CBCA, s. 122(3)). However, unanimous shareholder agreements may relieve directors of their duties to the extent that the unanimous shareholder agreement restricts the powers of the directors to manage or supervise the management of the corporation (OBCA, s. 108(5); CBCA, s. 146(5)).

B. Mandate

Securities law

Section 3.4 of NP 58-201 recommends that the board adopt a written mandate in which it acknowledges responsibility for

  • satisfying itself as to the integrity of the CEO and other executive officers
  • adopting a strategic planning process and approving, at least annually, a strategic plan
  • identifying the principal risks of the issuer's business and ensuring the implementation of systems to manage these risks
  • succession planning
  • adopting a communication policy
  • internal control and management information systems
  • developing the issuer's approach to corporate governance

Section 3.4 of NP 58-201 also recommends that the board's written mandate set out

  • measures for receiving feedback from stakeholders; and
  • expectations and responsibilities of directors, including basic duties and responsibilities with respect to attendance at board meetings and advance review of meeting materials.

Reporting issuers (excluding venture issuers) are required to disclose in the issuer's management information circular relating to the election of directors the text of the board's written mandate or, if the board does not have a written mandate, to describe how the board delineates its role and responsibilities (58-101F1, s. 2).

C. Orientation and continuing education

Securities law

Section 3.6 of NP 58-201 recommends that new directors receive comprehensive orientation covering the role of the board and its committees, the expected contribution of individual directors and the nature and operation of the issuer's business. Reporting issuers are required to disclose what measures the board takes to orient new directors (58-101F1, s. 4(a); 58-101F2, s. 3).

Section 3.7 of NP 58-201 recommends that the board provide continuing education opportunities for all directors. Reporting issuers are required to disclose the measures the board takes to provide continuing education for its directors (58-101F1, s. 4(b); 58-101F2, s. 3).

D. Assessments

Securities law

Section 3.18 of NP 58-201 recommends that the board, its committees and each individual director be regularly assessed regarding effectiveness and contribution. Reporting issuers are required to disclose whether the board, its committees and individual directors are regularly assessed (58-101F1, s. 9). If assessments are regularly conducted, issuers must describe the process used for the assessments; if assessments are not regularly conducted, issuers must describe how the board satisfies itself that it, its committees and individual directors are performing effectively (58-101F1, s. 9). Venture issuers are subject to a reduced disclosure requirement (58-101F2, s. 8).

E. Ethical business conduct

Securities law

Section 3.8 of NP 58-201recommends that the board adopt a written code of business conduct and ethics, applicable to directors, officers and employees of the issuer. The code should address

  • conflicts of interest, including transactions and agreements in respect of which a director or executive officer has a material interest
  • protection and proper use of corporate assets and opportunities
  • confidentiality of corporate information
  • fair dealing with the issuer's security holders, customers, suppliers, competitors and employees
  • compliance with laws, rules and regulations
  • reporting of any illegal or unethical behaviour (NP 58-201, s. 3.8)

Section 3.9 of NP 58-201 recommends that the board be responsible for monitoring compliance with the code and that only the board or a board committee be empowered to grant waivers from the code to the issuer's directors or executive officers. Conduct by a director or executive officer that constitutes a material departure from the code will likely constitute a "material change" within the meaning of National Instrument 51-102, Continuous Disclosure Obligations (NP 58-201, s. 3.9). Where a material departure from the code constitutes a material change to the issuer, the Canadian securities regulatory authorities "expect that the material change report will disclose, among other things, the date of the departure(s), the party(ies) involved in the departure(s), the reason why the board has or has not sanctioned the departure(s), and any measures the board has taken to address or remedy the departure(s)" (NP 58-201, s. 3.9).

Reporting issuers (excluding venture issuers) are required to disclose whether the board has adopted a written code and, if so, (a) disclose how a person may obtain a copy of the code, (b) describe how the board monitors compliance or satisfies itself regarding compliance with the code, and (c) provide a cross-reference to any material change report filed since the beginning of the issuer's most recently completed financial year that pertains to any conduct that constitutes a departure from the code (58-101F1, s. 5(a)).

Reporting issuers (excluding venture issuers) are required to describe any steps the board takes to ensure directors exercise independent judgement in considering transactions and agreements in respect of which a director or executive officer has a material interest, and all reporting issuers are required to disclose what steps, if any, the board takes to encourage and promote a culture of ethical business conduct (58-101F1, s. 5(b)–(c); 58-101F2, s. 4). All issuers that have adopted (or amended) a written code must file a copy on the System for Electronic Document Analysis and Retrieval (SEDAR) no later than the date on which the issuer's next financial statements are to be filed (NI 58-101, s. 2.3).

F. Conflicts

OBCA/CBCA

A director or officer of a corporation must disclose the nature and extent of any interest that he or she has in a material contract or transaction with the corporation, whether made or proposed, if the director or officer

  • is a party to the contract or transaction
  • is a director or an officer of a party to the contract or transaction, or
  • has a material interest in a party to the contract or transaction (OBCA, s. 132(1); CBCA, s. 120(1))

The director's or officer's interest must be disclosed within the time-frame prescribed by the relevant corporate statute (OBCA ss. 132(2)–(3); CBCA ss. 120(2)–(3)).

In general, a director may not vote on a contract or transaction in which he or she has a material interest (OBCA, s. 132(5); CBCA, s. 120(5)). There are exceptions for contracts that involve the director's remuneration or an indemnity in which he or she has an interest (OBCA, s. 132(5)(a) – (b); CBCA, s. 120(5)(a)–(b)). An exception is also made if the contract or transaction is with an affiliate of the corporation (OBCA, s. 132(5)(c); CBCA, s. 120(5)(c)).

Where a director or officer of a corporation fails to disclose his or her interest in a material contract or transaction in accordance with the applicable provisions of the OBCA or CBCA, the corporation or a shareholder of the corporation (or in the case of an offering corporation under the OBCA, the Ontario Securities Commission) may apply to the court for an order setting aside the contract or transaction and/or directing that the director or officer account to the corporation for any profit or gain realized (OBCA, s. 132(9); CBCA, s. 120(8)).

Securities law

Reporting issuers (excluding venture issuers) are required to describe any steps the board takes to ensure directors exercise independent judgement in considering transactions and agreements in respect of which a director or executive officer has a material interest (58-101F1, s. 5(b)).

4Delegation by the board of directors

OBCA/CBCA

Subject to the articles, by-laws or any unanimous shareholders agreement, the board of directors may appoint officers of the corporation and delegate to them responsibility for managing the corporation's business and affairs (OBCA, s. 133; CBCA, s. 121).

However, while the board is generally permitted to delegate responsibilities to a managing director, committee of directors or officer of the corporation, the following responsibilities may not be delegated:

  • submitting to the shareholders any matter requiring shareholder approval;
  • filling vacancies on the board, in the office of auditor or (under the OBCA) in key management positions;
  • issuing securities (except on terms already approved by the board);
  • declaring dividends;
  • purchasing, redeeming or otherwise acquiring shares issued by the corporation;
  • paying a commission on the sale of shares;
  • approving annual financial statements, management information circulars, take-over bid circulars and directors' circulars; and
  • adopting, amending or repealing by-laws (OBCA, s. 127(3); CBCA, s. 115(3)).

A. Audit committee

OBCA/CBCA

Each of the OBCA and the CBCA requires an offering corporation or a distributing corporation, as applicable, to have an audit committee composed of at least three directors, a majority of whom must not be employees of the corporation or any of its affiliates (OBCA, s. 158(1); CBCA, s. 171(1)).

Audit committees are responsible for reviewing the corporation's annual financial statements before they are presented to the full board for approval (OBCA, s. 158(2); CBCA, s. 171(3)).

Securities law

Subject to certain exceptions, all reporting issuers are required to have an audit committee (NI 52-110, ss. 1.2 and 2.1).

Section 3.1 of NI 52-110 requires that reporting issuers (excluding venture issuers) have a minimum of three audit committee members and, subject to limited exceptions, requires all audit committee members to be "independent." In addition to the requirements for independence in s. 1.4 of NI 52-110 (see section 2C. above), s. 1.5 of NI 52-110 sets out supplementary bright-line tests that (for audit committee composition purposes only) deem an individual not independent if the individual

  • accepts, directly or indirectly, any consulting, advisory or compensatory fee from the issuer or any subsidiary of the issuer, other than as remuneration for acting as a board member or as a part-time chair or vice-chair of the board; or
  • is an "affiliated entity" of the issuer or any of its subsidiaries (NI 52-110, ss. 1.3 and 1.5).

Reporting issuers (including venture issuers) are required to disclose whether each audit committee member is independent (52-110F1, s. 2; 52-110F2, s. 2).

NI 52-110 also requires that all members of the audit committee of a reporting issuer (excluding a venture issuer) be "financially literate" in that they have the ability to read and understand a set of financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by the company's financial statements (NI 52-110, ss. 1.6 and 3.1(4)). It is not necessary for a member to have a comprehensive knowledge of GAAP and GAAS to be considered financially literate (52-110CP, s. 4.1). The level of understanding required depends on the complexity of the business. If the issuer is a complex financial institution, a greater degree of education and experience is necessary than would be the case for an audit committee member of an issuer with a more simple business (52-110CP, s. 4.2).

Reporting issuers are required to disclose whether each audit committee member is financially literate and the education and experience of each audit committee member that is relevant to the performance of his or her responsibilities as an audit committee member (52-110F1, ss. 2–3; 52-110F2, ss. 2–3).

The audit committee must have a written charter that sets out its mandate and responsibilities, and reporting issuers (excluding venture issuers) are required to include the text of the charter in their annual information forms (NI 52-110, ss. 2.3 and 5.1; 52-110F1, s. 1; 52-110F2, s. 1).

Under s. 4.1 of NI 52-110, the audit committee must have the authority to

  • engage independent counsel and other advisors
  • set and pay the compensation for any advisors employed by the audit committee
  • communicate directly with the internal and external auditors

External auditors must report directly to the audit committee (NI 52-110, s. 2.2). Additional responsibilities of the audit committee include

  • recommending to the board the nomination and compensation of the external auditors
  • overseeing the external auditor's work, including resolving disagreements between management and the auditor over financial reporting
  • pre-approving all non-audit services to be provided to the issuer by the external auditor;
  • reviewing all financial statements, management's discussion and analysis, and annual and interim profit or loss press releases before this information is publicly disclosed
  • assessing the adequacy of procedures for reviewing the issuer's public disclosure of financial information other than its financial statements, management's discussion and analysis and profit or loss press releases
  • establishing procedures for the receipt, retention and treatment of complaints received regarding accounting, internal accounting controls or auditing matters and the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters
  • reviewing and approving the issuer's hiring policies regarding present and former employees and partners of the issuer's external auditor (NI 52-110, s. 2.3; 52-110CP, s. 2.1)

Reporting issuers (including venture issuers) are required to disclose any recommendation of the audit committee to nominate or compensate an external auditor that was not adopted by the board and explain why the recommendation was not adopted (52-110F1, s. 7; 52-110F2, s. 4).

B. Nominating committee

Securities law

Section 3.10 of NP 58-201 recommends that the board of a reporting issuer appoint a nominating committee composed entirely of independent directors. The nominating committee should be responsible for identifying individuals qualified to become new board members and recommending to the board the new director nominees for the next annual meeting of shareholders (NP 58-201, s. 3.13).

In making its recommendations, the nominating committee should consider

  • the competencies and skills that the board as a whole should possess
  • the competencies and skills of each existing director
  • the competencies and skills of each new nominee
  • whether the new nominee can devote sufficient time and resources to his or her duties as a director (NP 58-201, s. 3.14)

Reporting issuers (excluding venture issuers) are required to disclose whether the board has a nominating committee composed entirely of independent directors and, if not, what steps the board takes to encourage an objective nomination process (58-101F1, s. 6(b)). All reporting issuers are required to disclose the process by which the board identifies new candidates for board nomination (58-101F1, s. 6(a); 58-101F2, s. 5).

NP 58-201, s. 3.11 recommends that the nominating committee have a written charter that establishes the committee's purpose, responsibilities, member qualifications, member appointment and removal, structure and operations (including any authority to delegate to individual members or subcommittees), and the manner of reporting to the board. Section 3.11 also recommends that the nominating committee be given the authority to engage and compensate outside advisors. If they have a nominating committee, reporting issuers (excluding venture issuers) are required to disclose the responsibilities, powers and operation of the committee (58-101F1, s. 6(c)).

C. Compensation committee

Securities law

Section 3.15 of NP 58-201 recommends that the board appoint a compensation committee composed entirely of independent directors. The compensation committee should be responsible for

  • reviewing and approving corporate goals and objectives relevant to CEO compensation
  • evaluating the CEO's performance in light of those corporate goals and objectives and determining or making recommendations to the board with respect to the CEO's compensation based on this evaluation
  • making recommendations to the board with respect to non-CEO officer and director compensation, incentive-compensation plans and equity-based plans
  • reviewing executive compensation disclosure before the issuer publicly discloses this information (NP 58-201, s. 3.17)

Reporting issuers (excluding venture issuers) are required to disclose whether the board has a compensation committee composed entirely of independent directors and, if not, what steps the board takes to ensure an objective process for determining compensation (58-101F1, s. 7(b)). If they have a compensation committee, reporting issuers (excluding venture issuers) are also required to disclose the responsibilities, powers and operation of the committee (58-101F1, s. 7(c)). All reporting issuers are required to disclose the process by which the board determines compensation for the issuer's directors and officers (58-101F1, s. 7(a); 58-101F2, s. 6).

Section 3.16 of NP 58-201 recommends that the committee have a written charter that establishes the committee's purpose, responsibilities, member qualifications, member appointment and removal, structure and operations (including any authority to delegate to individual members or subcommittees), and the manner of reporting to the board.

Finally, the compensation committee should have authority to engage and compensate outside advisors (NP 58-201, s. 3.16).

D. Other committees

Securities law

Subsection 3.4(g) of NP 58-201 recommends that if issuers choose to appoint a corporate governance committee, the committee should have a majority of independent directors with the remaining directors being "non-management" directors. 

Reporting issuers are required to identify any standing committees other than the audit, compensation and nominating committees and describe their function (58-101F1, s. 8; 58-101F2, s. 7).

Resources

Statutes, Instruments, Policies and Forms