Company Interests and Director Responsibilities

As the directors of a company, their primary responsibility is to act in the best interests of the business. This means making decisions that benefit the company as a whole, not just individual directors.

Directors are expected to exercise their powers for the benefit of the company, not for personal gain. According to the Companies Act, directors must act with the care and diligence that a reasonable person would exercise in similar circumstances.

The interests of the company must be paramount in decision-making. This means prioritizing the company's goals and objectives over personal interests or biases.

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As a director, you have a fiduciary duty to act in the best interests of the company. This means you must prioritize the company's interests over your own and those of shareholders, creditors, and other stakeholders.

Directors must manage the company's assets to its benefit and may not divert any property or business advantage belonging to the company to themselves. This is a fundamental aspect of the fiduciary duty, which also includes disclosing conflicts of interest, maintaining confidentiality, and ensuring the company complies with laws and regulations.

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A director's interests can sometimes overlap with those of the company, making it challenging to set aside personal interests. For instance, if a company is acquiring another company in which a director is a shareholder, the director's interest in the target company could encroach upon the best interests of the acquirer.

Directors should first determine whether the conflicts regime in the governing corporate statute captures the contract or transaction. If a director has a "non-trivial" personal interest in the subject matter, the contract is considered material, and the director must make prescribed disclosures.

A director's non-disclosure could attract costly litigation for breach of the fiduciary duty, oppression, and other causes of action. However, if disclosure is made where appropriate, the transaction may proceed subject to the terms of a unanimous shareholder agreement, if any, and the company's articles of incorporation.

To identify potential conflicts of interest, consider the following areas:

There are four types of conflicts of interest on the board:

Deliberately failing to disclose a conflict of interest is a serious breach of director duties and could result in criminal prosecution. Directors must take responsibility for their own legal compliance in this respect and cannot pass responsibility to the company.

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Directors must consider the interests of various stakeholders, including shareholders, creditors, employees, and the environment, when making decisions for the corporation's long-term prosperity.

The Canada Business Corporations Act allows directors to consider these stakeholders' interests, and the common law has developed to enable directors to look beyond the corporation when making decisions.

Directors must ensure that business is done in accordance with the law, and the scope of interests up for consideration expands as the law adjusts to better protect Canadians, the environment, and others.

Regulators have explored the intersection between competition, consumer protection laws, and environmental claims, leading to increased penalties for deceptive marketing.

Securities laws now require the disclosure and management of climate-related risks on behalf of corporations, and certain corporations are subject to new reporting obligations in connection with the prevention of forced labour in Canadian supply chains.

Directors must be attuned to changes in the legal landscape to understand what interests are at stake and what conduct is acceptable in the market.

Directors are responsible for a corporation's compliance with the law and must consider not only what consumers want and the government demands, but also how to weigh ESG-related commitments against the corporation's primacy.

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Directors have the discretion to determine what the best interests of a company are, which can include a wide range of factors beyond just financial success.

In Australia, directors must exercise their powers and discharge their duties in good faith in the best interests of the company and for a proper purpose, as per the law.

Directors can choose to prioritize different aspects of the company's interests, such as its reputation or long-term sustainability, over purely financial gains.

Here are some key aspects of company performance and mission that directors may consider:

Including Mission Statement in Company Performance can be a game-changer. By formally stating mission as part of the corporate purpose in the company's charter, the company sets a clear standard for all stakeholders and communicates its impact commitment to existing and future stakeholders.

This approach can constrain directors' and management's decision-making authority, which may influence how directors' and management's fiduciary duties are interpreted. It's essential to draft charter language with extreme care after consulting knowledgeable legal counsel.

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Including mission in the company's charter can also limit the permissible activities and operations of the company. This is why it's crucial to consider alternative corporate forms, such as the Benefit Corporation and the Social Purpose Corporation, if you want to incorporate mission into your company's charter.

Here's an example of how you can specify mission in your company's charter:

By doing so, you ensure that your company's mission is considered in every decision-making process, including in the context of a liquidation event. This can lead to better alignment between your company's performance and its mission.

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Directors have the discretion to determine what constitutes top performers within a company, taking into account various factors such as individual contributions, team dynamics, and overall company goals.

In exercising their judgement, directors must consider the best interests of the company, which may involve weighing financial, reputational, or other interests.

Directors can assess the performance of employees over different time horizons, allowing them to evaluate long-term contributions and potential.

The courts have confirmed that directors have considerable discretion in making these decisions, and will not second-guess business decisions unless they are manifestly unreasonable.

Directors can also determine the precise nature of interests that are to be advanced or protected, whether they be purely financial, reputational, or otherwise.

Early signs of potential conflicts can be subtle, but they're essential to identify to maintain a healthy company culture.

Unusual decision-making trends can be a red flag, suggesting that a director or directors are showing favour to certain outcomes. This could be due to conflicts of interest, so it's crucial to investigate further.

Sudden policy changes from the board might be a result of members bending the company's strategy to a more advantageous route for their own interests. Meeting minutes can provide valuable insight into legitimate reasons for this shift.

Inconsistent financial disclosures by board directors could suggest that they're hiding certain interests that might lead to a financial gain in conflict with the company's interests.

Personal relationships with vendors can make it difficult for directors to make decisions in the best interests of the company. If these relationships are detrimental to their friend or family member, they should withdraw themselves from business related to this vendor.

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Frequent private meetings, particularly with vendors, suppliers, or competitors, might be a sign that there is a potentially problematic relationship. Reminding the director of their obligations to avoid or declare conflicts of interest is advisable.

Here are some potential signs of conflicts of interest to look out for:

The long-term interests of a company are crucial to its success and sustainability. The AICD encourages directors to consider the long-term interests of the company, taking into account the perspectives of various stakeholders beyond just shareholders.

Directors have considerable discretion in determining what is in the best interests of the company, and they are permitted to consider a range of stakeholders in making decisions. This is often necessary to protect an organisation's reputation and ensure its sustainability over the longer term.

In Australia, the law supports the consideration of stakeholder interests, and courts will not question directors' judgement with hindsight unless it's an egregious case involving clear self-interest or acting contrary to the company's interests. This provides directors with comfort that stakeholder interests are a legitimate concern.

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Directors should take a long-term view of where the company's interests lie, while maintaining a respectful and transparent relationship with stakeholder groups. This approach can help build long-term value for organisations.

Here are some key principles for directors to consider:

By following these principles, directors can make informed decisions that benefit the company and its stakeholders in the long term.

A conflict of interest policy should set out to whom it applies and clearly define what you mean by 'conflicts of interest'. It should also illustrate the potential impact of an unchecked conflict, set out requirements for your directors in terms of disclosure and outline the consequences for non-compliance.

Directors have the right to authorise a conflict by passing an ordinary resolution, but this doesn't mean they won't have to step down as a director or face sanctions. Proper records should be kept of the disclosure of potential conflicts of interest, board meetings, and voting results.

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Self-dealing, related party transactions, perceived conflicts, and structural conflicts are all types of conflicts of interest that can arise on a board of directors. Self-dealing occurs when a director stands to gain personally from a board decision, while related party transactions involve a director's personal connections influencing their decisions.

To manage conflicts, the board can restrict a director's involvement in motions related to the conflict, have them recuse themselves from discussions and decision-making, appoint independent directors to oversee the matter, or recommend the director relinquish the conflicting interest. If they refuse, the next step would be to request their resignation from the board.

To prevent future conflicts, ensure your conflict of interest policy and procedures are part of the onboarding process for new directors, provide comprehensive training on what constitutes a conflict of interest, and conduct due diligence before approving major contracts and transactions. Cultivate a culture of transparency, openness, and integrity where directors prioritize the company's interests over personal interests.

Here are some key steps to prevent conflicts of interest: