In Canada, there is no minimum standard for corporate directors. To reflect on that, it might be useful to think about who the shareholders are and how directors are selected. Shareholders are by and large sophisticated, experienced business people. They understand the qualifications and traits required of a director much better than a lay person. They act carefully as for which director to select because they are making an important business decision. The western commercial reality is shaped by and reflective of the society featuring liberalism and personal autonomy. People should be free to decide how their businesses are organized and operated as long as they are not violating the law or other people’s rights because, ultimately, it is their “business”.
Moreover, the performance of the director is part of the commercial risk shareholders are going to take. If there is anything that shareholders can think of to manage or minimize the risk, i.e., matters that must be in consultation with the shareholders, they should consider writing it into the memo and articles. The idea that directors are bound by their designated power finds its expression in the law. For instance, section 136(1) of the British Columbia Business Corporate Act provides that, “The directors of a company must, subject to this Act, the regulations and the memorandum and articles of the company, manage or supervise the management of the business and affairs of the company.” Shareholders should be at liberty to frame delegation of power but, in doing so, they should also exercise that liberty with great deliberation.
Lastly, school education or ethical training won’t necessarily make one a better director. In rare cases would a director act irrationally or carelessly in one’s operation of a business; after all, their business reputation is at stake. It is true that no one would suit everyone’s taste, but if someone has a notorious reputation as a director, it is not very likely that shareholders would be willing to take a risk on that person.
In all, I don’t see why the legislator should be doing the job of screening directors for shareholders and their company. Neither are they in a better position than the shareholders themselves to set up the qualifications for corporate directors.
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I agree that legislators are probably not better positioned than shareholders to screen potential directors, and I am not sure that further education or training is a guarantee of more ethical directors (although it seems prudent to require directors to undertake some sort of ethics training so that they are prepared to respond appropriately to ethical conflicts as they arise).
However, there seems to me to be room in the existing legislation to expand on what qualifies an individual to become or act as a director, while still leaving the job of screening directors largely in the hands of shareholders. For example, section 124(2) of the BCBCA sets out factors that disqualify an individual from becoming a director. Perhaps added to that list should be disqualification where a company has a code of ethics, and the director has been found to have breached a corporation’s code of ethics.
While ideally shareholders would avoid ensconcing such a director in the first place, expanding the list of disqualifying factors might have the effect of putting shareholder’s who may be less sophisticated on notice for what they need to consider when accounting for a potential or current director’s qualifications.
Really good posts! I agree with both of you in that the legislation should not be screening directors and that task should be left to the shareholders. Thinking about the qualifications of directors is a good place to also visualize the tension between a state that leaves the markets to its own devices and one that is more controlling. There are pros and cons to both controlling the process of selecting a director and not controlling it. I think that Jasmin makes a good argument of finding a balance through the disqualifying factors.
I definitely agree with the idea that certain qualifications, such as formal education won’t necessarily make a better director. I think that keeping requirements along those lines (perhaps excluding mandatory ethics training once hired as a director) out of the legislation is important. There are so many people who are extremely entrepreneurial and business savvy who have built successful businesses without any formal education who could end up be great directors, and I think it would be too limiting to exclude potential directors for lack of formal education.
Great post!
When I think about further legislative controls on the appointment of Directors, I am reminded of what we had learned back at the start of the class, in that there are many forms of shares, the most basic being the “common” share, where ownership generally carries the right to vote, v.s. the “preferred” share, where ownership generally carries the right to secured financial benefit in lieu of the right to vote. Under these circumstances, where depending on what form of share you have dictates your ability to vote on appointment of directors, and also given the reality of public companies with tens of thousands of shareholders and more, I would err on having more legislative direction than not because as shareholder your decision making powers may be more apparent than real.
This article may be of interest to some of you – http://247wallst.com/investing/2012/06/04/companies-where-shareholders-have-no-power-at-all/.
Thanks for the recommendation. It was an interesting read. Sometimes having no say on the strategic development or day-to-day operation of a company is not necessarily a problem for the shareholders. Some of them prefer it that way for various reasons. Take Microsoft as an example, lots of the company’s shareholders probably got on board because they trust Gates’ direction. However, it becomes a problem when the company starts to lose money. That’s what made me think of the idea that the problem partly lies within the nature of business investment.
Thanks for commenting. I liked your input. Think of the role of law in our society. It is there to protect but also to limit the rights and interests of natural and legal persons. Including qualifications such as formal school training or years of experiences in the legislation would definitely change the dynamics of business management.
Thanks for your comments. My post was more focused on whether it is necessary to make some of the requirements mandatory through statutory provisions, such as educational background, work experience, and mandatory training. It is true that there is statutory provision barring people who were convicted of fraud and other crimes from sitting on a board. If we think of the law more broadly, what you were suggesting makes a lot of sense to me. Even if it is unnecessary to include rules of qualification and disqualification in the legislation, we should still consider putting them down in corporate by-laws, office manuals or developing industrial standards.
That is true. Regulations have to be reflective of common business practice.