All questions

Corporate leadership

i Board structure and practices

Responsibility for the governance of a corporation is vested in the corporation's board of directors (board). In Canada, the board is a single-tier body elected by the shareholders that is responsible for supervising the management of the corporation. If shareholders are not satisfied with the performance of the board, they may remove the directors or refuse to re-elect them.

The role of directors is one of stewardship and oversight. Directors have complete discretion to exercise their powers as they deem appropriate, subject to the constraints imposed by law. The board discharges its responsibilities through majority approval of the directors at board meetings.

Directors are neither required nor expected to devote their full time and attention to the corporation's affairs. Instead, responsibility for the day-to-day management of a corporation's affairs is typically delegated to the CEO and other senior executives who are responsible to, and report back to, the board. Appointing these senior executives and evaluating their performance are among the most important functions of the board. Notwithstanding such delegation, the board retains the ability to intervene in management's decisions and must exercise final judgement on matters that are material to the corporation. National Policy 58-201 Corporate Governance Guidelines (NP 58-201), issued by the CSA, recommends that a board adopt a written mandate in which it acknowledges responsibility for stewardship of the corporation.


The board may delegate a number of its responsibilities to committees of directors. However, certain responsibilities may not be delegated to such a committee, including (under the CBCA):

  1. making changes to the by-laws;
  2. approving the annual financial statements, a management proxy circular, a takeover bid circular or a directors' circular;
  3. issuing securities (except on terms already approved by the board);
  4. declaring dividends; and
  5. purchasing or redeeming shares of the corporation.

In practice, the committees of many boards do not formally approve the matters before them but return the matter to the full board with their recommendation.

All public corporations are required by statute to have an audit committee. Private corporations frequently choose to have an audit committee as a matter of good practice. Most public corporations also have separate committees to deal with compensation matters and director nominations and corporate governance. Corporations with larger boards may also have an executive committee. Boards also strike ad hoc or special committees from time to time to address specific issues or transactions.

Under the corporate statutes, the audit committee of a public corporation must be composed of at least three directors, a majority of whom must not be employees of the corporation or any of its affiliates. However, National Instrument 52-110 Audit Committees (NI 52-110) of the CSA requires that public corporation audit committees be composed of at least three members, all of whom must be independent directors, as defined in that instrument. NI 52-110 also requires that all members of the audit committee be financially literate – that is, 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 corporation's financial statements. Furthermore, corporations must disclose 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.

Public corporations are required to disclose publicly on an annual basis the processes by which a board determines compensation for a corporation's directors and officers, including the responsibilities, powers, experience and operation of the compensation committee of the board, if any, and the identity, mandate and compensation paid to any advisers retained by the committee in the past financial year. The overwhelming majority of Canadian public corporations establish a board committee that has responsibility for overseeing compensation matters. NP 58-201 recommends that a board appoint a compensation committee composed entirely of independent directors with responsibilities for oversight of the compensation payable to senior executives. The members of the compensation committee are not required to be independent or to have any particular expertise. However, if the compensation committee is not comprised solely of independent directors as defined in Section 1.4 of NI 52-110, the corporation must disclose what steps the board takes to ensure an objective process for determining executive compensation.

Most Canadian public corporations also have a board committee that has responsibility for overseeing the process for nominating directors for election by shareholders. NP 58-201 recommends that, before an individual is nominated as a director, the board, with advice and input from the nominating committee, should consider:

  1. the competencies and skills that the board, as a whole, should possess;
  2. the competencies and skills of each existing director and of each new nominee; and
  3. whether the new nominee can devote sufficient time and resources to serving as a director.

Public corporations are required to disclose publicly on an annual basis the process by which the board identifies new candidates for nomination, and the responsibilities, powers and operation of the nominating committee. The members of the nominating committee are not required to be independent or to have any particular expertise. However, if the nomination committee is not comprised solely of independent directors as defined in Section 1.4 of NI 52-110, the corporation must disclose what steps the board takes to ensure an objective nominating process.

Board chair

Boards appoint a chair from among the directors with responsibility to provide leadership to the board to enhance board effectiveness. The chair is responsible for, among other things, managing the board, setting the agenda, ensuring that directors are kept informed, presiding at director and shareholder meetings, and acting as a key liaison between the board and senior management.

Canadian boards typically do not appoint the CEO as board chair. Concerns about board accountability and process and the desire to provide independent leadership to the board have led most larger public corporation boards in Canada to appoint an independent director as board chair. NP 58-201 recommends that the chair of the board should be an independent director and, where this is not appropriate, an independent director be appointed as lead director. Public corporations are required to disclose whether the chair is an independent director and, if not, to disclose whether the board has a lead director. If there is no independent chair or independent lead director, a corporation must then disclose what the board does to provide leadership for its independent directors.

ii Directors

Directors are fiduciaries of the corporation they serve. This obligation and duty arises under common law, and is codified in the corporate statutes in the requirement that directors act honestly and in good faith with a view to the best interests of the corporation, and must exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. This fiduciary relationship requires a strict standard of conduct that includes loyalty and good faith, and requires directors to avoid putting themselves in a position where their duty to act in the best interests of the corporation conflicts with their other obligations.

Directors are required by corporate statutes to discharge their fiduciary duty 'with a view to the best interests of the corporation'. The Supreme Court of Canada has stated that the best interests of the corporation must not be confused with the interests of the corporation's shareholders or any other particular stakeholders of the corporation.

Director qualifications

Canadian corporate statutes impose minimal qualifications for directors. Any individual who is 18 or over and of sound mind and who is not bankrupt may serve as a director. Some Canadian corporate statutes also require that a certain percentage of directors of the board and committees be resident Canadians.

The ability of the board to exercise independent judgement is of fundamental importance to the governance of public corporations. As a result, most public corporation boards have a number of independent directors. Independent directors and the role they play in ensuring the board is able to exercise independent judgement have been a focus for those concerned with accountability in corporate governance. Rules for the determination of who may be considered to be an independent director are set out in both corporate and securities legislation in Canada. In addition, some Canadian institutional shareholders set their own standards for assessing director independence.

The corporate statutes define an independent director as any director who is not employed by the corporation or one of its affiliates. Under this definition, recently retired employees of the corporation and representatives of a controlling shareholder of the corporation would qualify as independent. Further, as the term affiliates involves the concept of control, directors or employees of a major, but not controlling, shareholder are technically independent under the corporate statutes.

The TSX requires a listed corporation to have at least two independent directors. For this purpose, an independent director is a person who:

  1. is not a member of management, and is free from any interest and any business or other relationship that could reasonably be perceived to materially interfere with the director's ability to act in the best interest of the corporation; and
  2. is a beneficial holder, directly or indirectly, or is a nominee or associate of a beneficial holder, collectively of 10 per cent or less of the votes attaching to all issued and outstanding securities of the corporation.

However, the TSX does not consider a person to be independent if within the past three years they have served as an employee or service provider to the listed corporation or its affiliates, or they currently serve as an employee or controlling shareholder of a corporation that has a material business relationship with the listed corporation.

For publicly traded corporations, there is yet another definition of independent director. The definition is set out in Section 1.4 of NI 52-110 of the CSA, and requires the board to consider whether there is a material relationship between the director and the corporation that could, in the board's view, be reasonably expected to interfere with the exercise of that director's independent judgement. In making its determination, the board must consider all direct and indirect relationships between a director and the corporation – past, present and anticipated – both individually and collectively. The board's determination is subject to certain bright-line tests that are similar to the director independence tests under the New York Stock Exchange's corporate governance listing requirements. Under these tests, recently retired employees and employees of a parent of the corporation are not independent. Public corporations are required to disclose annually which of the directors on the board are independent and which are not, and describe the basis for determining that a director was not independent. For audit committee purposes, there are additional bright-line director independence tests set out in Section 1.5 of NI 52-110 that correspond to requirements under the Securities Exchange Act of 1934 in the United States.

Election and term

Directors are usually elected by shareholders at the corporation's annual meeting. Most Canadian corporations provide shareholders with the opportunity to vote on each director individually, instead of en bloc for a slate of directors. Slate voting for directors is rare in Canada since the TSX senior exchange requires all its listed companies to provide for individual voting for directors. Currently, shareholders may vote for directors or withhold their vote, but cannot vote against a director. However, once the amendments to the CBCA, which were approved in May 2018, are proclaimed in force, shareholders will be able to vote against a director at a shareholder meeting where the number of director nominees is equal to the number of positions to be filled. A corporation's articles may provide for cumulative voting for directors, whereby each shareholder may cast one vote for each share held multiplied by the number of directors to be elected. However, this is very rarely seen in practice. The articles of a corporation may also permit a particular class of security holders, such as preferred shareholders, to elect one or more directors, or may permit a particular class of security holders to hold multiple voting rights, such as 10 votes per share.

Since 30 June 2014, companies listed on the TSX, other than those that are majority controlled, have been required to have adopted majority voting for the election of directors, either as a board policy or as an amendment to their constating documents. Under this majority voting framework, if in an uncontested election more votes are withheld from the election of a director than are voted in favour of the director's election, the director must immediately tender a resignation for consideration by the board. The board must accept the resignation absent exceptional circumstances, and it must make its determination as to whether to accept the resignation within 90 days and announce it via a press release promptly thereafter. A copy of this press release must also be provided to the TSX. When the CBCA Amendments are proclaimed into force, boards of publicly traded CBCA corporations will be elected under a majority voting standard when the election of directors is uncontested, meaning that a director of such a company who receives more against votes than for votes will not be validly elected, although they may continue in office for a period of up to 90 days.

Directors are generally elected annually. Although corporate statutes permit directors to be elected for terms of up to three years and on a staggered basis, such practices are rare since most Canadian corporate statutes permit shareholders to remove one or more directors from office mid-term and elect their replacements. In addition, the TSX senior exchange requires all its listed companies to elect directors annually.

Board diversity requirements

Virtually all Canadian issuers subject to public reporting requirements in Canada, other than venture issuers and investment funds, are subject to disclosure requirements respecting the representation of women on the board and in senior management, and respecting board renewal mechanisms. All provinces and territories other than British Columbia, Yukon and Prince Edward Island have implemented amendments to a national instrument on disclosure of corporate governance practices that require issuers to disclose annually in the proxy circular for the annual meeting (or the annual information form if the issuer does not send a proxy circular to its investors) the number and percentage of women directors and women who are executive officers. Such issuers must disclose whether:

  1. the issuer has adopted term limits for board service or other mechanisms for board renewal, and if so to describe them and, if not, to explain why;
  2. the issuer has a written policy for the identification and nomination of women directors and, if not, to explain why;
  3. the board considers the level of representation of women on the board in identifying and nominating candidates for director and how it does so, and if it does not, to explain why;
  4. the issuer considers the level of representation of women in executive officer positions when making executive officer appointments and how it does so, and if it does not, to explain why; and
  5. the issuer has adopted targets respecting the number or percentage of women on the board and in executive officer positions, and if not, to explain why.

If an issuer has adopted a written policy for the identification and nomination of women directors, the issuer must summarise the policy and its objectives, the measures taken to implement it, the annual and cumulative progress made on achieving the objectives and whether, and if so how, the board or nominating committee measures the policy's effectiveness. If targets regarding women on the board or in executive officer positions have been adopted, the issuer must disclose the annual and cumulative progress made on achieving the targets.

Once the amendments to the CBCA are proclaimed into force, the diversity disclosure requirements under that statute will apply to all publicly traded companies (including venture issuers) incorporated under the CBCA.