COVID-19 has had and will continue to have impacts on virtually every corporation in Canada and globally. Such a disrupting chain of events, combined with freshly enacted changes to corporate legislation
for federally incorporated corporations, may raise questions on the scope of directors’ fiduciary duty. If the recent legislative amendments have provided certain clarifications on a director’s fiduciary duty towards the corporation, they have had limited opportunities to be tested. The public health crisis may set the stage for such a test.
As discussed below, in discharging their fiduciary duty, directors will need to consider different factors. To benefit from the protection of the business judgement rule doctrine, directors should formulate and follow a sound protocol.
Fiduciary duty in context
Under the Canada Business Corporations Act
(the CBCA), directors of a corporation have a “fiduciary duty” towards the corporation according to which they must “act honestly and in good faith with a view to the best interests of the corporation.”
In cases of alleged breach of such duty, courts apply the “business judgement rule,” which commands great deference to directors, to the extent directors followed a reasonable process in decision-making.
passed in the summer of 2019, amended the CBCA by enacting a non-exhaustive list of factors that can be considered when determining the corporation’s best interests, namely the interests of shareholders, employees, retirees and pensioners, creditors, consumers, and governments, as well as the environment and the long-term interests of the corporation. As discussed in our previous legal update
, this may well be viewed as reflecting a general shift from a shareholders’ primacy to a stakeholders’ primacy model, in line with the Supreme Court of Canada’s holdings in two landmark cases.
This shift is not unique to Canada. Many US constituency statutes now specifically allow directors to consider the interests of various stakeholders in board deliberations. For instance, New York State’s corporate legislation provides that in their decision-making process, directors may consider the interests of constituents such as employees, retirees, customers, creditors and communities as well as the short- and long-term interests of the corporation.
In the US, more than 30 states have adopted constituency provisions. Many international organizations and institutional investors have also recognized the importance of stakeholder governance,
as recently reaffirmed by members of the World Economic Forum.”
Complex times call for a protocol
In times of crisis, directors may find it more challenging to discharge their fiduciary duty, as certain decisions must be made promptly, while the interests of various stakeholders evolve quickly and may conflict. For many corporations, the current pandemic will put the stakeholders’ primacy model to the test.
Although the CBCA now provides that the best interests of a corporation may be informed by the interests of different stakeholders, the statute remains silent as to the relative importance of each group of stakeholders. What should directors do when different groups manifest conflicting interests?
The Supreme Court’s decision in BCE highlights that, although stakeholder interests should be taken into consideration, directors should remember their duty is to act in the corporation’s best interests. The Supreme Court outlines that no one stakeholder is more important than the others when determining the best interests of the corporation, and that assessing competing interests depends on the factual situation.
Various groups may have competing expectations, concerns and requests, which may inevitably lead to directors facing tensions in applying their fiduciary duty. Since directors are elected by shareholders, they may naturally be inclined to favour such group in order to improve their chances of being re-elected. The following are examples stakeholders whose interests may conflict with those of shareholders during a pandemic:
- Shareholders vs creditors. COVID-19 has pushed many corporations to the brink of insolvency. When corporations find themselves in such uncertainty, creditors’ and shareholders’ interests will often diverge.
- Shareholders vs employees. Interests of shareholders and employees may differ greatly during a pandemic. To limit costs and increase or maintain shareholder value, directors may want to reduce the number of active employees or introduce payroll cutbacks. On the other hand, to preserve the health and safety of their employees, corporations may implement social distancing and other security measures, which could decrease production and profits.
- Shareholders vs community. In reaction to a pandemic, directors may choose to make certain decisions that are a priori better for the community than they are for the shareholders, at least on a short-term basis. For instance, several companies have partnered with not-for-profit organizations to make or distribute masks, donate sanitizer, soap, bleach and food, and manufacture gowns.
- Shareholders vs shareholders. Shareholders are not a homogeneous group. While institutional shareholders tend to be committed for the long haul, other shareholders expect returns on their investment in a shorter timeline. Directors must consider the whole spectrum of interests in that group.
Properly taking into account all relevant interests in these circumstances requires a delicate balancing act at the board level. Directors must make sure that management acts swiftly when required, while keeping their eyes on the best interests of the corporation and the fact there is to be a return to “normal” life after COVID-19. They should remember that in the BCE decision, the Supreme Court of Canada stated that when stakeholders interests diverge, directors must act “in the best interests of the corporation, viewed as a good corporate citizen.”
Committing to a protocol
Directors’ main role is to oversee managerial efforts. When facing a crisis, directors should first implement an oversight structure that ensures the decision-making process is adequate and would withstand the parameters of the business judgement rule. For instance, some boards may consider creating a separate “crisis committee” to which they delegate specific responsibilities in order to centralize and streamline decision-making. Other boards will increase the frequency of their meetings and ask that new matrices be included in the risk management dashboard presented to them. These actions will help directors demonstrate that they properly discharged their duty of care.
However, a protocol should also be put in place to help directors invoke the protection of the business judgement rule with respect to their fiduciary duty. Having such a protocol in place is important, as directors will be judged by the process they followed:
- Mapping. As a first step in helping directors discharge their fiduciary duty, identifying and categorizing stakeholder interests is key. This will enable directors to map out areas that need particular attention and decisions that might require further reflection. This is true for decisions made to cope with COVID-19, as well as for drawing the back-to-normal roadmap.
- Weighing. Once various groups of stakeholders have been mapped, directors should do their best to weigh carefully their interests and determine their impact on the corporation’s best interests, viewed as a good corporate citizen. Conflicts are to be expected.
- Deciding. Board decisions should not be made before directors are comfortable that such decisions have been informed by carefully weighing stakeholder interests, in the particular context of the crisis and its expected consequences on the corporation.
- Documenting. As directors remain accountable for their decisions, and different stakeholders might have conflicting views on what’s in the corporation’s best interests, directors should maintain accurate and adequate records of their decision-making process.
The global crisis created by COVID-19 is likely to test the stakeholder primacy model, in Canada and elsewhere, and might eventually provide answers on the hierarchy of competing claims and their impact on the corporation’s best interests.
In that context, when facing difficult choices resulting from the pandemic, directors must follow a protocol.
The authors would like to thank articling student Camille A. Provencher for her help in preparing this legal update.