Strong governance is essential for any organization to achieve long-term success.
Whether you run a business or a not-for-profit corporation, governance establishes the framework for decision-making, accountability, and compliance. Understanding the legal foundations of governance is critical to ensuring the organization operates smoothly and within the law.
What Is Governance?
Governance refers to the structures, policies, and processes that guide how a business or other organization is managed and controlled. It sets out the roles and responsibilities of key stakeholders, such as directors, officers, and shareholders or members, and it establishes rules for making decisions, resolving disputes, and ensuring compliance with legal obligations.
Legislation
The legislation that applies to a corporation operating in Ontario will depend on the statute of incorporation. Incorporators can choose from
- The Ontario Business Corporations Act (OBCA);
- The Canada Business Corporations Act (CBCA);
- The Ontario Not-for-Profit Corporations Act (ONCA); or
- The Canada Not-for-Profit Corporations Act (CNCA).
The decision to incorporate under provincial or federal legislation is up to the incorporator, and it will likely depend on whether they intend to operate across Canada or only in Ontario. However, one key difference between the OBCA and the CBCA is that the CBCA requires at least 25% of directors to be resident Canadians, so the OBCA may be preferable for foreign entities that want to set up a subsidiary to operate in Ontario and do not have a local individual in mind to run it. Also, if an incorporator decides to incorporate federally, it will need to register with each province where it intends to operate – so a federal corporation will have to pay at least two sets of government fees.
For not-for-profit corporations, neither the ONCA nor the CNCA require resident Canadian directors. However, one important difference is that the ONCA allows ex-officio directors, who are appointed based on their position rather than being elected, while the CNCA does not. Therefore, incorporating provincially may be preferable if a not-for-profit wishes to have a non-voting advisory position on the board reserved for a specific office holder such as a past Chair or a parent company’s Chief Executive Officer.
Despite these differences, there are a lot of similarities between the above statutes. The next section sets out some duties of directors and officers that are codified in all of them. There is also a substantial body of case law in which courts have elaborated on the duties of directors and officers and the rights of shareholders or members to hold them accountable.
Core Components of Governance
- Board of Directors
The board of directors is central to governance, as directors are responsible for managing or supervising the management of the business and affairs of the corporation. Directors’ responsibilities include, among other things,
- Hiring and firing officers such as the Chief Executive Officer, Chief Financial Officer, and Corporate Secretary;
- Setting strategic direction for officers and employees to implement;
- Monitoring financial performance;
- Ensuring compliance with laws and regulations; and
- Reporting to shareholders or members.
Directors have a fiduciary duty to act honestly and in good faith with a view to the best interests of the corporation. Courts have interpreted this broad legal obligation to include specific duties such as protecting confidential information and avoiding conflicts of interest. Directors also have a duty of care, which requires them to exercise the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances. In determining whether they have fulfilled this duty, courts will consider whether directors made reasonable business decisions in light of all the circumstances about which the directors knew or ought to have known.
Directors of both federal and Ontario corporations can defend against claims for breach of the above duties by establishing that they relied in good faith on the reports of professionals or on financial statements presented by an auditor or an officer of the corporation. The OBCA and ONCA also provide for reliance in good faith on a report or advice of an officer or employee of the corporation, where it is reasonable to do so in the circumstances.
- Officers
While the role of directors is to oversee officers, they share some of the same legal obligations such as the duty of loyalty and duty of care discussed above. Sometimes the roles overlap, such as in the case of a Chair who must be a member of the board of directors. However, for other positions that involve more operational responsibility, such as the Chief Executive Officer and Chief Financial Officer, it is recommended that these roles be kept separate from the board so that directors will not be influenced by such officers when discussing their performance.
- Shareholder or Member Rights
For business corporations, shareholders play a vital role in governance by approving financial statements, electing directors, and voting on major decisions such as mergers and dissolutions. In not-for-profit corporations, members have similar rights.
A key difference between business corporations and not-for-profit corporations is that business corporations can pay out profits to their shareholders, whereas not-for-profit corporations reinvest their profits in corporate activities that further their mission. Not-for-profit corporations are also generally exempt from paying corporate income taxes; however, they cannot issue tax receipts to donors unless they are specifically registered as charities with the Canada Revenue Agency.
- Governance Policies
Effective governance requires clear policies that outline how decisions are made and disputes are resolved. Common governance policies include:
- Conflict of interest policies;
- Codes of conduct;
- Confidentiality and privacy policies;
- Whistleblower policies; and
- Risk management frameworks.
Having the above policies in place helps clarify the conduct expected of corporate directors and officers and protects them from the risk of liability.
In addition to governance policies, corporations require other types of policies such as employment policies to ensure compliance with laws and regulations. These include:
- Occupational health and safety policies;
- Workplace violence prevention policies;
- Workplace harassment prevention policies;
- Accessibility for Ontarians with disabilities policies; and
- Pay equity policies.
- Compliance and Reporting
Governance also involves ensuring the organization meets its legal and regulatory obligations. In Ontario, businesses must:
- File annual returns with the appropriate registry (e.g., Ontario or federal business registries).
- Maintain accurate corporate records, including meeting minutes and shareholder or member agreements.
- Adhere to tax laws, employment standards, and industry-specific regulations.
Keeping corporate records up to date is essential so the corporation will be prepared to respond to government audits or inquiries from prospective purchasers or lenders.
Governance Challenges and How to Address Them
- Conflicts of Interest
Conflicts of interest can arise when personal or other interests or duties may interfere with a corporate director’s or officer’s duty to make decisions that are in the best interests of the corporation. There is a substantial body of case law in which courts have developed the content of these obligations beyond what is set out in legislation. Having qualified professionals develop robust policies governing the disclosure and management of potential conflicts of interest is an important tool to help reduce the risk of personal liability.
- Lack of Transparency
Organizations must ensure stakeholders have access to relevant information, including financial reports. Transparency fosters trust and reduces the risk of disputes.
- Poor Role Definition
Ambiguities in roles and responsibilities can lead to inefficiencies, gaps, or disputes. Governance frameworks should clearly define the duties of directors, officers, and other stakeholders.
- Legal Non-Compliance
Failing to comply with legal requirements can result in fines, lawsuits, and reputational damage. Regularly reviewing governance practices and seeking legal advice can help ensure compliance.
Finally, a key component of governance and risk management is undertaking an annual risk assessment and consulting an insurance professional to mitigate risks of an uninsured loss.
Why Governance Matters
Strong governance is a legal requirement that also gives you a competitive advantage. Organizations with robust governance frameworks are better equipped to navigate challenges, attract investors or donors, and achieve their strategic goals. Additionally, good governance reduces risks related to fraud, litigation, and reputational damage.
How Nelligan Law Can Help
Our experienced business law team understands the complexities of organizational governance in Ontario. Whether you need help drafting policies, resolving disputes, or ensuring compliance with legal obligations, we’re here to support your success.
📞 Contact us today to learn how we can help you build a strong and compliant governance framework for your organization. Let’s ensure your business thrives with confidence and clarity.