Discussion Activity 6.3: Meaning of Independence

Discussion Activity 6.3:

After reading page 311 of the Casebook and reflecting on the content, it appears to me that one of the dominant justifications for the “independence” requirements for Boards is the existence of the fiduciary duty and duty of care placed on Directors in the Federal and Provincial companies Acts  carry out duties/execute functions in the “best interest of the Corporation”(e.g. section 122 of the C.B.C.A.).

The “independence” of directors would be a factor in favour of arguing that a Board’s execution of its duties/functions are in the best interest of the Corporation rather than one fuelled by self-interest. This is because the “independence” of the directors means they are less likely to be constrained by competing interests. As we have discussed at length, the best interest of a Corporation is the sustainment and growth of its profitability and financial well being. And so, for public companies on the stock exchanges, the existence of the independent Boards encourages the public to continue to support these Corporations through, for example, buying their products and investing into them (i.e. put $$$ into the economy) as the Corporations would be perceived to be adequately regulated by both by the companies themselves (i.e. an independent Board operating only on good faith and exercise of skill, care and diligence) and the Government (i.e. Companies Acts and Provincial Securities Legislation policing the companies).

For private companies, I think one of the reasons there is no “independence” requirements is the potential impracticality of such requirement . As we have learned, in the private company context it is more likely to have Directors wearing additional “hats”, i.e. Shareholder and Officer (employee) hats, because, as the name suggests, the corporation is privately held. This means there is a small number of shareholders who are likely the founders or those in the inner circle of the founders and who all play key roles in the operation of the Corporation. By forcing an “independence” requirement, there may be a roadblock of the incorporation of potential private corporations as potential founders would now have to seek out independent directors, likely at considerable $$$$, and who may not share the same views as the founders which may lead to litigation down the road.