Noses in, fingers out

Six decisions at Lakehead

In one quarter Lakehead Marine faced six decisions. Sort them before reading on: approve a $0.15 dividend · hire a plant manager for the welding shop · adopt a five-year strategy to enter the Great Lakes ferry market · approve the annual financial statements · choose between two aluminum suppliers · dismiss the CEO after two missed years.

Three belong to the board: the dividend, the strategy, the statements — and the CEO’s dismissal makes four. Two belong to management: the plant manager and the supplier. The line between them is the subject of this lesson, and the midterm tests it with exactly this kind of list.

What the board is for

The board’s job is oversight, and it has a short, stable list of responsibilities:

• Strategy — approve the direction and the major bets, and monitor progress against them.
• The CEO — appoint, set the pay of, evaluate, and if necessary replace the chief executive; plan the succession.
• Major transactions and distributions — acquisitions, large financings, and every dividend (module 4: the board declares).
• Risk — satisfy itself that management has identified the principal risks and has systems to manage them.
• Financial-reporting integrity — approve the annual statements (CBCA s. 158 requires the directors’ approval, evidenced by a director’s signature, before the statements may be issued) and oversee the auditor through the audit committee (lesson 5.4).

Everything else — hiring below the executive level, choosing suppliers, pricing a bid, running the welding shop — is management. The phrase directors use for the boundary is noses in, fingers out: the board should know what is happening and ask hard questions, but it does not do the work. A director who approves purchase orders has stopped overseeing management and started being it, and when the numbers go wrong nobody knows who was accountable.

Two fiduciary duties

The CBCA imposes two duties on every director and officer (s. 122(1)):

• (a) The duty of loyalty — act honestly and in good faith with a view to the best interests of the corporation. A director who steers a contract to a company she owns has breached it.
• (b) The duty of care — exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. A director who signs the statements without reading them has breached it.

The two are different. Loyalty is about whose side you are on; care is about how hard you work at it. A perfectly loyal director can be negligent, and a diligent one can be conflicted. Since 2019 the Act also lists, in s. 122(1.1), factors directors may consider in judging the corporation’s best interests — shareholders, employees, retirees, creditors, consumers, governments, the environment and the corporation’s long-term interests. It is a permission, not a new duty, and it is the statutory hook for module 6’s ESG material.

Approval and certification are both required

A public company’s statements pass through two separate hands. The board approves them under CBCA s. 158. Separately, under National Instrument 52-109, the CEO and CFO each personally certify the annual filing (Form 52-109F1) and each interim filing (Form 52-109F2): that the filing is fairly presented, and that they have designed and evaluated disclosure controls and internal control over financial reporting. Venture issuers file lighter “basic” certificates (FV1 / FV2) without the control representations. This is Canada’s counterpart to the US Sarbanes-Oxley certification, with one difference worth stating precisely: it is management certification — there is no auditor attestation of internal control in the Canadian rule. The exam trap is to present the two as alternatives; they are cumulative.