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Directors of Crown Corporations: An Introductory Guide to Their Roles and Responsibilities

The Director of a Crown Corporation

They say the best companies have board members who ask the tough questions. In Crown corporations this is especially important because balancing public policy and commercial objectives is the toughest part of the job.1

The first challenge for new directors of Crown corporations is to acquire a working knowledge of their corporation's policy objectives and activities. The appropriate level of knowledge, while not as detailed as that customarily possessed by management of the corporation, should be sufficient to allow the board member to have an understanding of how major events and transactions would affect the corporation.

This general knowledge would include an understanding of the Crown corporation's public policy objectives, the commercial aspects of its mandate and the nature of the industry or milieu within which it operates. Directors should be sensitive to the need to balance the Crown's broad policy objectives and priorities with the corporation's commercial objectives. As a first step, directors should become familiar with the general parameters of the legislation that created their particular Crown corporation, any legislative Acts applicable to the corporation, its general by-laws, and Part X of the Financial Administration Act.

A more specific knowledge of the entity, how it is organized, how it is financed, its products and services, and its major suppliers and customers, is normally picked up by each board member during actual meetings of the board of directors.

In addition, most Crown corporations provide briefing packages, arrange for tours of key locations, and in some cases set up consultations with knowledgeable individuals within or outside the corporation. For most new directors, however, the experience of working on the board with the other members proves to be the most effective means of acquiring the necessary working knowledge of their corporation.

Responsibilities and duties

To fulfil their responsibility to manage the affairs of the company, boards of directors exercise judgement in four broad areas:

  • establishing the corporation's strategic direction;
  • safeguarding the corporation's resources;
  • monitoring corporate performance; and
  • reporting to the Crown.

Establishing the corporation's strategic direction

We are approaching financial maturity as a corporation, and fundamental in this progress was the advice and support we received from our board of directors in developing and approving our annual corporate plan.2

Involvement in the development and approval of the planned strategic direction for the corporation is likely the most important duty of the board. This activity may be spread over a number of meetings and may involve requests to management for clarification or elaboration. The exercise usually culminates in a major board decision taken once a year to approve the corporation's corporate plan.3

Directors of Crown corporations have a leadership role. To ensure that the most appropriate strategic direction for the corporation has been selected, board members will need to grapple with the complexities of choosing from among competing alternatives. The perspective of outside directors often provides a meaningful balance to the recommendations formulated inside the corporation.

In establishing the strategic direction, the board satisfies itself that management has considered the relevant factors that could influence the future direction of the corporation. Once approved, the corporate plan is submitted to the responsible minister for consideration and recommendation to the Governor in Council. The approved corporate plan then provides a basis for many of the subsequent decisions requiring approval by the board of directors and for evaluating performance.

Safeguarding the corporation's resources

Safeguarding the corporation's resources is probably the most time-consuming duty of board members. All the major decisions involving the corporation's assets and their financing must be reviewed and approved by the board.

The board of directors approves the annual operating and capital budgets,4 major new project proposals and borrowing requests. The annual budgets outline planned performance and the proposed allocation of the available resources among the competing priorities. Major new project proposals may include investments (e.g. the initiation of new capital projects or acquisitions) and divestitures (e.g. the sale of assets or the spinning-off of non-core business activities). Each major new project proposal may demand significant involvement of the board.

In evaluating the merits of each initiative, the board ensures that the proposals are consistent with the planned strategic direction of the corporation. Based on its deliberations, the board may suggest modifications requiring further submissions before the proposal is approved.

Monitoring the performance of the corporation

The board of directors will receive periodic reports prepared by management that outline and explain how well the corporation is performing relative to the objectives set out in the approved plan and the actual results of past years. The board may also request the CEO to provide additional information.

Regular monitoring of corporate performance assists the board in formulating positions on current and upcoming decisions to be taken. It helps directors to learn about the corporation, its management and the overall appropriateness of the corporation's strategic plan. It also alerts the board of directors to new developments inside the corporation and in its external environment. On occasion, these developments may lead to a reappraisal of the planned strategic direction.

Management reports to the board also provide the opportunity for directors to assess the quality of previous decisions "after the fact." This feedback often assists directors in their deliberations on future decisions presented to them for approval.

Reporting to the Crown

The board of directors should ensure that the information provided to the Crown is sufficient to allow an evaluation of how well the corporation has fulfilled its objectives.

The legislation governing each corporation prescribes minimum levels of information disclosure. As actual practice varies widely, the board of directors should ensure that the corporation's reporting exceeds the minimum requirements.

Annually, the Crown corporation provides the minister with its corporate plan, borrowing plan, annual report, capital budget, and in some cases operating budget, including the audited financial statements. In addition, the board is at liberty throughout the year to instruct the chairperson to inform the minister of any matter it believes deserves the minister's attention.

The board of directors and its committees

Not all boards are identical. The Crown corporation's enabling legislation normally specifies the number of directors, the conditions governing their appointment, and the powers and duties of the board of directors.

The chairperson provides leadership and presides over the activities of the board. He or she is the formal link between the minister and the board. Normally, the chairperson and the CEO establish a practice of maintaining ongoing contact with the minister and his or her office. The CEO also serves on the board as a member and is the board's primary link with the management of the corporation.

The board may create committees to perform assigned tasks. Results of committee deliberations usually flow through to regular board meetings where they may be ratified. The requirement for and use of committees varies widely among Crown corporations. Committees commonly created by boards are executive committees and audit committees. Executive committees generally handle business that must be dealt with between board meetings.

The FAA requires that most Crown corporations establish an audit committee.5 Audit is an important aspect of the FAA, Part X legislative framework for Crown corporations. Audit committees oversee the internal audits required by the legislation.6 Audit committees also review and advise the board of directors on the corporation's financial statements, the annual auditor's report7 and the plan and reports with respect to special examinations. Special examinations are a form of value-for-money audit on the corporation's management systems and are required at least once every five years.8 The external auditor is entitled to attend all meetings of the audit committee and may also request that meetings be called. For many of the Crown corporations, the Auditor General of Canada is the annual external auditor and the special examiner.9

Other committees are established on the basis of need as perceived by the board. For example, in a number of larger Crown corporations, a compensation committee exists to deal with salary recommendations, the determination of benefits for the officers of the corporation, and to evaluate the performance of the CEO.

Board meetings

Board meetings are the main forum for board members to fulfil their responsibilities. Board members should prepare well for these meetings and actively participate in them. These meetings provide an opportunity for directors to receive information, to develop their understanding of the important issues, and to influence the decisions of the corporation.

Crown corporation board meetings are convened several times a year. For corporations that have offices across the country, board meetings may be held occasionally at these locations. The draft agenda, minutes of previous meetings and the relevant information relating to matters requiring board approval are usually sent to directors in advance. Directors may request that items be added to the agenda either before or at the meeting.

Normally, board meetings begin with a review and consideration of any outstanding matters arising from the previous meeting's minutes. Regular agenda items may include progress reports from the CEO, reports from board committees and reviews of the corporation's financial position and operating results. Other items on the agenda often relate to policy decisions, strategy, budgets, key personnel decisions and major current projects. Senior officers of the corporation are sometimes invited to these meetings to present and explain specific issues.

The chairperson will invite and lead the discussion on most agenda items. Directors are expected to speak their minds. They may seek clarification of information presented to them and may request any other information they consider appropriate to their needs. When a consensus cannot be reached, the chairperson may defer the issue or put it to a vote. A director has the prerogative to request that an item be deferred to another board meeting if additional information is needed.10 If a director chooses to dissent or to abstain from a vote, he or she should ensure that the minutes record his or her position.11

Privileged communications

Thou shalt keep internal discussions confidential: other directors, management and staff expect a high degree of confidentiality about board discussions and other corporate matters. In order to allow full, open discussion, keep this in mind.12

Confidentiality is an issue of concern to boards of directors. It is customary to assume that the affairs of the corporation are deliberated in confidence and that their disclosure only follows from authorized decisions and according to agreed procedures (e.g. speeches, press releases and briefings). Sensitive information in many areas such as human resources, corporate strategy and policy could cause damage if inappropriately released to the public. The frankness of the discussions at board meetings requires that both their nature and their content be kept confidential. Colleagues are more likely to risk voicing their concerns and to pose difficult questions if they trust that the confidentiality of these discussions will be respected. Formal communication of any decisions by the board is normally the responsibility of the chairperson or the CEO.

Constraints on directors

Directors of Crown corporations must, at all times, be sensitive to potential conflict-of-interest situations. A conflict of interest could exist when a board member uses corporate property for his or her own purposes or derives a personal benefit from an impending decision of the board. If the possibility of such a situation occurs, the FAA requires that the individual board member explicitly disclose the nature and extent of his or her interest to the chairperson. Time permitting, this would normally be done in advance and in writing. Once this is done, the board member would be expected to refrain from voting on the matter under consideration.13 A declaration of the disclosure should normally be entered in the minutes of a board meeting.

In addition to concerns about conflict of interest, directors of public sector corporations should ensure that any partisan political activity they may engage in does not impair the conduct of their duties as a director or the public perception of their position.

To avoid possible embarrassment for the minister and the Crown, directors are cautioned about public statements concerning their Crown corporation. Depending on the circumstances, the spokesperson for the corporation is usually the CEO, the chairperson of the board of directors or the minister. Before an individual board member acts as a spokesperson, he or she should first receive clearance from the chairperson or the board of directors.

Directive power

There are cases where the Governor in Council, acting in the national interest, can direct a Crown corporation to do something that its commercially oriented board members would not normally do. Although this prerogative is there, and it is pristine in its concept, it is rarely used.14

There are rare occasions where the Crown perceives a need to direct a corporation to perform an action deemed to be in the public interest which the corporation would not normally do in the context of its regular business.15 The FAA has provided for this eventuality by including a provision allowing the minister to give a directive to the corporation. Before issuing a directive, the minister consults with the board of directors and obtains the approval of the Governor in Council. Directives are expected to be tabled in Parliament shortly after issue. Once the directive has been delivered by the minister to the board of directors, the board is charged with the responsibility of ensuring that the directive is carried out promptly and efficiently.16 Because a directive is deemed to be in the best interests of the corporation, the board of directors is absolved of any potential consequences regarding compliance with it.

Extent of a director's liability

A Crown corporation operates within a certain framework, that is to say, the FAA. Every major decision that either goes beyond the corporate plan or contemplates the purchase of shares in another company has to go back to the Crown for an Order in Council. With this measure of control, the directors are much less exposed.17

Members of boards of directors are exposed to potential liabilities related to their responsibilities and obligations as outlined in their Crown corporation's enabling legislation and in other statutes.18 A director of a Crown corporation is expected to exercise the care, due diligence and skill that a reasonably prudent person would in comparable circumstances. In carrying out his or her duties, each director is asked to exercise good business judgement based on common sense and his or her personal experience. Various Canadian laws place responsibility on directors of both public and private corporations to ensure that certain public goals are respected by their corporation (e.g. environmental protection, employment standards or tax deductions).

In recognition of this exposure to liability, the accountability framework set out in Part X of the FAA for federal Crown corporations provides the director of a Crown corporation with indemnification protection for the financial costs of any liability that might be realized, provided that the director:

  • acted honestly and in good faith, with a view to the best interests of the Crown corporation; and
  • in the case of any criminal or administrative action or proceeding enforced by a monetary penalty, believed on reasonable grounds that the conduct was lawful.19

For further information

This introductory Guide sets out basic elements of the director's role from the perspective of the Crown Corporations Directorate. Individual directors are encouraged to seek clarification of their role from their particular Crown corporation and through the following documents:

  • Part X of the FAA;
  • their Crown corporation's enabling legislation, charter and by-laws; and
  • the materials cited in the list of references that follows this text.

Users of this Guide are reminded that its purpose is to present information of interest primarily to newly appointed directors of federal Crown corporations and that, as such, it has no official or legal sanction nor does it constitute a legal document.

1 Annette Verschuren, member of the Board of Directors of Cape Breton Development Corporation, and President, Michaels Stores Canada. [ return ]

2 Donald Lander, Chairman and Chief Executive Officer, Canada Post Corporation. [ return ]

3 FAA, Part X, section 122 describes the scope, contents and form of the corporate plan. [ return ]

4 FAA, Part X, sections 123 and 124 describe the scope and form of the operating and capital budgets. [ return ]

5 FAA, Part X, section 148 describes audit committees and specifies that they are required for Crown corporations with four or more directors. [ return ]

6 FAA, Part X, subsection 131(3) requires that internal audits be conducted. [ return ]

7 FAA, Part X, section 132 requires an annual auditor's report on the financial statements. [ return ]

8 FAA, Part X, sections 138 to 141 describe special examinations. The examiner is required to submit a report to the board of directors of his findings based on an examination of the management systems and practices of the corporation. [ return ]

9 FAA, Part X, sections 134, 135 and 142 describe the selection and appointment process for external auditors. The general rule establishes that the Auditor General shall be the auditor or joint auditor of parent corporations named in Part I of Schedule III and is eligible to be an auditor of corporations named in Part II of Schedule III. [ return ]

10 The duty of diligence is discussed in Chapter 8, Duties and Responsibilities of Directors in Canada, sixth edition (CCH Canadian Limited, 1987). [ return ]

11 FAA, Part X, sections 111 and 112 provide information on directors' right of dissent. [ return ]

12 Derek Oland, President and Chief Operating Officer, Moosehead Breweries (a former member of the board of directors of a Crown corporation). [ return ]

13 Details on disclosures of conflict can be found in the FAA, Part X, sections 116-118. [ return ]

14 Hugh Mullington, former President and Chief Executive Officer, Canadian Commercial Corporation. [ return ]

15 Corporations listed in Schedule III of the FAA are subject to GiC directives. The enabling legislation of some corporations also contains provisions for ministerial directives. [ return ]

16 FAA, Part X, section 89.1 requires that a directive be implemented in a prompt and efficient manner and states that it is deemed to be in the best interests of the corporation for the board to comply with the directive. [ return ]

17 Claude Taylor, former Chairman and Chief Executive Officer, Air Canada (a former Crown corporation). [ return ]

18 For a detailed description, refer to Duties and Responsibilities of Directors in Canada, sixth edition (CCH Canadian Limited, 1987). [ return ]

19 FAA, Part X, section 119 sets out the indemnification provisions. [ return ]

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