The most basic principle of corporate directorships is that the directors have a fiduciary duty to act in the best interests of their corporation. It has followed closely that directors should serve the best interests of the shareholders – in most circumstances this means all the shareholders, not the majority or some faction to which a director might owe allegiance. Although it’s not so clear how expansively directors should interpret those corporate interests, the trend is toward consideration of more groups of “stakeholders.” The past year has seen important reinforcements for that trend.
Longstanding Judicial Leanings
In 2008, the Supreme Court of Canada decided the case BCE Inc. v. 1976 Debentureholders.1 This case involved a corporate buyout in which shareholders would benefit but debenture holders would see significant decline in the value of their holdings. The Court found that the plan preserved debenture holders’ legal rights, and that directors were not required to go further to protect debenture holders’ expectations. Therefore the Court found that the board of directors had acted appropriately, and rejected the debenture holders’ claims of oppression.
In the following decade, the BCE decision was interpreted to provide directors with discretion to consider interests of stakeholders in addition to shareholders. But there remained considerable disagreement about which groups of stakeholders could be considered, and whether any of these considerations were mandatory rather than merely optional.
Canada Business Corporation Act (CBCA) Amended to Allow Broad Perspectives
The CBCA applies to federally-incorporated corporations.2 CBCA requires directors and officers of a corporation in exercising their powers and duties to “act honestly and in good faith with a view to the best interests of the corporation.” (CBCA s. 122(1)(a)) However, “best interests” has been vague and therefore open to varying interpretations.
Recently, CBCA has been amended effective June 21, 2019 (by Bill C-97) to add the following clarification:
(1.1) When acting with a view to the best interests of the corporation under paragraph [122(1)(a)], the directors and officers of the corporation may consider, but are not limited to, the following factors:
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The interests of
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Shareholders
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Employees
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Retirees and pensioners
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Creditors
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Consumers
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Governments
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b. The environment
c. The long-term interests of the corporation.
Note this amendment authorizes directors to consider these stakeholders’ interests, but does not require them. It is widely pointed to as Parliament’s belated response to the BCE decision.
What Variant Forms Allow Corporations To Embrace Broader Interests?
Variations on standard corporate forms and requirements are available and growing, to allow corporations to formalize their support for broader interpretations of corporate best interests, and even to codify duties to outside stakeholders. For example, consider these options offered in British Columbia:
* Community Contribution Companies (CCC)
A CCC is a corporation incorporated under the British Columbia Business Corporation Act (BCBCA) that combines a for-profit business model with the obligation to contribute to the community both through the corporation’s business activity and its profits and must include the following statement in its notice of articles:3
“This company is a community contribution company, and, as such, has purposes beneficial to society. This company is restricted, in accordance with Part 2.2 of the Business Corporations Act, in its ability to pay dividends and to distribute its assets on dissolution or otherwise.“
A CCC director “must act with a view to the community purposes of the company set out in its articles” in addition to the general obligations to act honestly and in good faith with a view to the best interests of the corporation. CCCs are restricted in their ability to declare dividends or redeem shares. In addition, if they are dissolved, at least 60% of their distributable assets must be transferred to another CCC before any amounts can be distributed to shareholders.
* Benefit Corporations
In addition, in 2019 British Columbia has enacted the first benefit corporation statute in Canada, through Bill M 209 (Assent May 16, 2019; will come into force by regulation of the Lieutenant Governor in Council).4 A company is a benefit company if its articles contain:5
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The statement “This company is a benefit company and, as such, is committed to conducting its business in a responsible and sustainable manner and promoting one or more public benefits.”
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A provision that specifies the public benefits to be promoted by the benefit company, and sets out commitments to conduct the benefit company's business in a responsible and sustainable manner, and to promote the public benefits specified in its statement.
What About Guidance in the United States?
U.S. corporations and their directors face the same questions, although the view that directors’ duties extend only to shareholders continues to have much broader legitimacy in business and legal circles. As a response, a growing number of states provide for “public benefit corporations” similar to the one described above for BC.
In addition, however, there has long been support for broader perspectives similar to those attributed to Canada in the preceding section. An important proponent of these wider views has been the Business Roundtable, which is an association of chief executive officers (CEOs) of many of America’s leading companies. In recent decades, the Business Roundtable has issued a series of guidelines addressing corporate purpose and also corporate governance by boards of directors and senior management. The latest word from the Business Roundtable appears in its latest “Statement on the Purpose of a Corporation”, issued in August 2019 (I wrote about this here}.
The newest Statement has received considerable publicity, much of which describes it as offering big changes to corporate America’s approaches. The entire document is one page of Statement, followed by eleven pages reproducing 181 CEOs’ signatures. The Statement first emphasizes the CEOs’ collective belief in free market principles, and businesses’ “vital role in the economy.” It then presents the following commitments, and closing statement, quoted in full:
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“Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.
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Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.
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Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions.
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Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.
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Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.
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Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country."
This new Statement reaffirms longstanding principles from the Business Roundtable, that corporations serve their shareholders, and can do so by attending to the needs of other stakeholders as well.
Now What?
Corporations remain free to codify directions to directors in their articles of incorporation and bylaws, requiring narrow or broad interpretations of the “best interests of the corporation” and decision-making criteria. Absent such guidance, the trend is toward permission to consider broader interests that short term profit maximization for shareholder profit … but as of late 2019 it’s still just a trend.
Self-Assessment Checklist
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Have the board of directors and CEO (or the equivalent) of my organization made formal policy statements about the organization’s priorities toward serving the interests of:
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Shareholders (or the equivalent)
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Employees
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Customers
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Its community(ies)
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Its customers
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The environment
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Other ______
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Specialty Technical Publishers (STP) provides a variety of single-law and multi-law services, intended to facilitate clients’ understanding of and compliance with requirements.
About the Author
Jon Elliott is President of Touchstone Environmental and has been a major contributor to STP’s product range for over 30 years.
Mr. Elliott has a diverse educational background. In addition to his Juris Doctor (University of California, Boalt Hall School of Law, 1981), he holds a Master of Public Policy (Goldman School of Public Policy [GSPP], UC Berkeley, 1980), and a Bachelor of Science in Mechanical Engineering (Princeton University, 1977).
Mr. Elliott is active in professional and community organizations. In addition, he is a past chairman of the Board of Directors of the GSPP Alumni Association, and past member of the Executive Committee of the State Bar of California's Environmental Law Section (including past chair of its Legislative Committee).
You may contact Mr. Elliott directly at: tei@ix.netcom.com
Endnotes
1 [2008] S.C.J. 37.
2 Canada Business Corporations Act, RSC 1985, c C-44, as amended.
3 BCBCA, S.B.C. 2002, c. 57 as amended, s. 51.911.
4 BCBCA s. 51.991 – 51.995 and conforming amendments, enacted by “2019: Business Corporations Amendment Act (No. 2),” 2019:20 (Bill M 209), Assent May 16, 2019; to come into force by regulation of the Lieutenant Governor in Council (still pending in October 2019).
5 BCBCA s. 51.992.