Business Law Blog

A recent paper by ICSA: The Governance Institute and the Investment Association, entitled The Stakeholder Voice in Board Decision Making, offers boards guidance on directors’ duties under U.K. law, focusing on the identification of and engagement with key stakeholders and consideration of stakeholders’ interests in board decision-making.

Boards of Canadian corporations will likely find the paper informative, as it discusses principles that they have been advised to consider since the last guidance on directors’ duties was issued by the Supreme Court of Canada, in BCE Inc. v. 1976 Debentureholders ([2008] 3. S.C.R. 560).

As is well-known among Canadian directors and their advisors, in BCE the Court confirmed two things about stakeholder interests: first, that the duty of loyalty is owed only to the corporation itself, not to the shareholders or any other group of stakeholders; and second, that in considering the best interests of the corporation, the board may need to consider the interests of stakeholders affected by its decisions, as those stakeholders are entitled to be treated equitably and fairly. The Court also confirmed the high degree of deference that courts will give to boards’ business decisions.

The best interests of a “legal fiction” can be difficult to conceive, and it has been suggested that a duty to act in those interests is so indeterminate as to be of little use to directors and judges. A corporation’s interests, however, are ultimately to achieve the particular business purpose that it was formed or has evolved to achieve, and a proper consideration of that purpose and the long-term plan that has been formulated to achieve it will guide the board in satisfying its fiduciary duty, so long as the affected stakeholders are treated fairly and equitably along the way.

The list of stakeholders entitled to that treatment will vary from corporation to corporation, but it will almost always include shareholders, creditors, workers, customers, suppliers and the people who share communities with the corporation (not only physical communities, where factories or offices are located, but virtual and legal communities as well). In Canada, that list might include the particular interests of First Nations. The environment is often mentioned in the same breath as local communities, but they are intertwined: the stakeholders are the human beings affected by the corporation’s influence on the environment. Similarly, a corporation may be required to consider a community as large as a polity, where its actions can have an effect on the democratic institutions and people - in their capacity as citizens - of a country in which it operates. As recent events have shown, this is becoming more relevant, and more complicated, as businesses expand across borders.

The movement towards consideration of a broader range of stakeholders parallels recent developments in corporate governance in the United States, which respond to the rise in corporate short-termism and are applicable in certain ways in Canada as well. Developments such as the principles promoted by the Investors Stewardship Group and the Business Roundtable attempt to focus boards and major investors on long-term, durable value through good governance, stewardship and productive engagement.

These institutional and judicial developments from both sides of the Atlantic highlight the evolving role of corporate directors - particularly directors of public corporations - and the evolving understanding of the role those corporations play in our society. Directors of Canadian companies must continue to heed the elements of their fiduciary duty that demand a perspective with both breadth and depth: consideration of the treatment of stakeholders and the long-term interests of the corporation itself.