Keeping Up

The “business judgment rule” is a buffer between directors and irate stakeholders who wish to prosecute them for their decisions. The BJR is the means whereby a court will defer to the decision makers’ judgment, expecting that their knowledge, expertise and experience render them more able to make the best decision at the time and in the context. For that barrier to hold those business decisions must have been made honestly, prudently, in good faith and on reasonable grounds. Directors have the delegated authority and it is their duty to act, but their choices may be tested to determine if they were reasonable, consistent, and did not inflict prejudice. Courts do not attempt to guess the “correct” decision but whether what was done fell within the broad spectrum of reasonableness allowed by the business judgment rule.

This is all well and good, and directors are thankful for the existence of the BJR - but a serious threat to its insulating qualities is the ability to show that you understood all the options before the company in the first place. To make a reasonable decision seems to require an unreasonable amount of information, far beyond the company and its markets, something akin to a seer’s knowledge of every factor that might affect the organization. It is a disquieting thought at a time when directors are drinking from a fire hose of hot topics or issues, a steady, voluminous and relentless gusher.

Drowning is not an option, so what to do? In the immortal words of Clint Eastwood, you have to know your limitations, and it is unlikely that one person can cover the waterfront. Fortunately, you are part of a group called a board so there are others facing the same dilemma and self interest is a wonderful motivation. Divide and conquer is a good overall strategy but remember that you and your colleagues are each responsible for fulfilling your Duty of Care, a separate and distinct responsibility. This suggests that every director ought to be at least aware of issues and changes and what they imply, but how to do that?

Directors on the audit committees of public companies face the wholesale changes created by the adoption of International Financial Reporting Standards (IFRS). In April 2006, the Accounting Standards Board of Canada (AcSB) announced that Canadian GAAP will be replaced with IFRS for publicly-listed companies. These standards, which were developed by the International Accounting Standards Board (IASB), will replace Canadian GAAP by 2011. The announcement advised that "Boards of directors of public companies should ensure that a member of management, or an advisor, is responsible for reporting on a regular basis on the implications of IFRS conversion".

Every public company director ought to understand that 2011 is just around the corner. January 1, 2010 is the adoption date for calendar-year entities, the year when those companies must present an opening balance and comparative data conforming to IFRS. Like the full financial statements, MD&A and so forth, these are “core” documents and thus the responsibility of all directors, not just the audit committee. Further, IFRS may affect debt covenants, revenue recognition, compensation and a host of other topics. There will be a lot to track and, in the meantime, financial statement certification has not gone away. MI 52-109 is alive and well but support evidence may change under IFRS.

As if this is not enough, there are currently 24 separate projects that will revise an existing standard or clarify some part of it before a “final” set of IFRS will be issued. The first 8 are expected in 2009, 4 in 2010 and 6 in 2011, plus 6 dragging along with no due date announced. Never mind that the standard continues to morph, keep up.

In parallel there is the Emerging Issues Committee of the AcSB, busily pumping out new encyclicals every month while cautioning that they will be superseded by IFRS – but until then Canadian GAAP applies – so -

About eighteen months ago the Canadian Securities Administrators (CSA) announced Proposed Form 51-102F6, a Statement of Executive Compensation, designed to improve disclosure rules for executive compensation.

I will stop without enumerating the issues emerging in labour law, workplace health and safety, the environment, trade, taxation and so forth and so on.

So, a reasonable question might be: “How do I keep up?” In the face of more frequent “normal course reviews” by the CSA & Co, plus the massive onslaught of material, how does one do it? The key is that you are expected to be well informed, not necessarily an expert on every issue, and that can be done. Most of the major law and accounting firms have good web sites, some with electronic feeds to help automate the flow. The CSA, the CICA, the EIC and a lot of other acronyms will be pleased to host your visit to their web sites. If you want to track major court decisions, sign up at The Court (http://www.thecourt.ca/). Your personal level of interest and the time available will dictate how much or how many you can digest.

I find two tactics truly invaluable. First, I attend the breakfast seminars presented by the Institute of Corporate Directors (ICD). The subject matter is always germane and the Q&A sessions are invaluable. Second, I attend the monthly “Director’s Series” sponsored by Deloitte and Touché and their web site is especially good. For example, “How to monitor a sea change” on the Deloitte web site is an excellent, non-accountants overview of IFRS.

In summary, the Duty of Care suggest that we never cease learning, and it is the way to keep up.