Boards: Directors’ Obligations

What does it mean to have a seat on the board? It means responsibility. It means long term strategic planning. It means keeping an eye on the bottom line. But above all else – at least, in Canada that is – it means acting in the best interests of the corporation.

And that, my dear friends, is a very loaded expression. But instead of telling you what it does mean, it’s perhaps more helpful if I tell you what it does not mean. Under Canadian corporate law, acting in the best interests of the corporation does not (well, at least not necessarily) mean acting only in the best interests of shareholders. This is a key distinction between Canadian and US corporate law.

In the Canadian context, shareholders are certainly important, but there other considerations. In fact, here it is straight from the Supreme Court of Canada:

In considering what is in the best interests of the corporation, directors may look to the interests of,inter alia, shareholders, employees, creditors, consumers, governments and the environment to inform their decisions. (see the BCE Decision at paragraph 40)

To some of my American readers this may seem preposterous, but it is the law in Canada. Let me reiterate the point with another quote from the Supreme Court of Canada:

The fiduciary duty of the directors to the corporation is a broad, contextual concept.  It is not confined to short-term profit or share value. (See the BCE Decision at paragraph 38)

So whether you are a founder or an investor, before you take a seat on the board, make sure you understand that the decisions you make as a director have to be in the best interest of the company, and not in the best interests of your pocketbook. This does not mean that the two are mutually exclusive. But there may be times where both founders and investors alike have to make decisions which are not in their personal interests, but are in the interests of the corporation. Failure to do so exposes the director to claims of oppression and breach of statutory duty.

So take a seat, but take it with your eyes open.

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