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Small Business Week 2018: Director Duties

Written by Krystin Kempton, Associate

Directors are elected by shareholders of a company to manage or supervise the management of the affairs of the company. Directors set the company’s overall direction and goals and directors appoint officers to carry out those goals. Directors of Canadian companies are required to fulfill certain duties, which can be broken down into two types: 

1. fiduciary duties, which are duties that result from being in a trust position; and

2. the duty of care, which is the expectation that a director will perform his or her duties in accordance with a certain standard.

Directors have duties imposed on them regardless of whether that person is a director of a company or a not-for-profit organization – there is no immunity for volunteers. 


Fiduciary Duties

A director is a fiduciary of their company. Fiduciary duties exist to provide protection to shareholders. There is a duty to act in good faith and in the best interests of the company, a duty to avoid conflicts and potential conflicts of duty and interest and a duty to not take advantage of company opportunities. A director is not permitted to act in his or her own self-interest or those of other people – the interests of

the company must be put first. A conflict of interest exists when there is the potential to favour personal interests, or those of other people, over the interests of the company.

Examples of conflicts of interest include:

  •     • any contract between a director and the company which could result in profit for that director,
          or which furthers the interests of that director’s relatives or friends;
  •     • accepting a gift as a token of friendship from an employee of the company before a vote about 
          that employee takes place;
  •     • disclosing confidential information about the company for personal use;
  •     • and taking part in a decision to terminate an employee of a company who has had personal issues 
          with that director’s child or spouse.

 

So what happens if there’s a conflict?

  •    • disclose the interest to the other directors;
  •    • leave the meeting when the matter is discussed and voted on;
  •    • don’t do anything that might influence the discussion or vote; and
  •    • ensure the conflict has been recorded in the meeting minutes.

    The other directors may approve a transaction that involves a conflict for a director, but the interested director must abstain from voting.

 

Duty of Care

The duty of care requires a director to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Directors with special knowledge and experience are expected to apply those skills when making decisions.

In practice, a director fulfills this duty of care by making informed decisions. Directors should always spend the time necessary to make reasonable decisions. This includes attending board meetings, learning about the issue, seeking input from the company’s officers, asking necessary questions and assessing the implications of a decision before voting.

Categories: Business

 

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