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Charters for Crown corporation Board of Directors and board committees

From Treasury Board of Canada Secretariat

Crown Corporation Guidance

This document is intended as advice or guidance and as a source of considerations and resource materials on the subject of charters for Crown corporation boards of directors and board committees. This document does not constitute a Crown corporation legal or policy requirement nor does it establish monitoring obligations on the part of Treasury Board Secretariat.

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Executive Summary: Charters for Crown Corporation Boards of Directors and Board Committees

The board of directors of a Crown corporation has the legal responsibility to act in the best interests of the corporation and to exercise due care and diligence. A board is expected to provide strategic guidance to management and oversee the activities of the corporation.

As part of their corporate governance responsibilities, many Crown corporations’ boards voluntarily adopt a “board charter,” a board-approved document that outlines the processes and structures established to manage the corporation’s business in order to meet its mandate. In addition to a board charter, many Crown corporations also voluntarily adopt board-approved “committee charters” for any of the committees established by the board.

Charters have been identified as a key measure to improve the governance of Crown corporations and establish common and clearly-understood practices. While the level of detail, language and format of any charter will ultimately vary according to the individual needs of a Crown corporation, board members are encouraged to adopt charters that are comprehensive and that address all functional areas of board activity, as deemed appropriate by the board.

Board charters typically include:

  • legal roles and responsibilities of all directors, collectively and individually;
  • specific stewardship activities and role of the board in:
    • setting the strategic direction of the corporation;
    • identifying principal risks to the corporation and its resources;
    • CEO hiring, direction, performance management and succession planning;
    • ensuring proper information management and timely communications;
    • maintaining board independence from management;
    • participating in or supporting board evaluations; and
    • providing for orientation and continuous professional development for board members;
    • roles and responsibilities of the chair of the board;

Board charters may also describe quorum, by-law processes, procedural matters and other administrative board operations, if these are not captured adequately in other documents.

Individual committee charters function essentially as each committee’s terms of reference and typically include:

  • responsibilities of the committee;
  • guiding principles for the work of the committee;
  • timing and processes for reporting to the board of directors;
  • organization of the committee; and
  • general work practices and processes of the committee.

Addressing such items in charter documents assists the directors of Crown corporations in clarifying and understanding their individual and collective roles and responsibilities for the corporation. It is important to note, however, that charters do not have the legal authority or impact of applicable legislation, regulations, etc. It is essential in adopting board-approved charters to avoid potential misinterpretations (or conflicts) with mandates or operating requirements set out in legal instruments, as the latter would prevail in the event of a conflict.

1.0 Introduction

Parent Crown corporations, including any wholly-owned subsidiaries that report as parent Crown corporations, are encouraged to develop charters for their boards of directors and board committees. This document provides guidelines on items/issues that a Crown corporation may wish to address in their charter documents.

2.0 Purpose of Charters

In the 2005 Review of the Governance Framework for Canada’s Crown Corporations – Meeting the Expectations of Canadians, charters are identified as a key measure to improve governance of Crown corporations:

Measure #10

To strengthen the corporate governance of Crown corporations, the government will work with Boards to adopt a charter that would define clearly the roles and responsibilities of the Board.

For a director of a Crown corporation to fully exercise his or her responsibility under section 115(1) of the Financial Administration Act (FAA) to act in the best interests of the corporation and to exercise due care and diligence, itis critical to understand and support the management and oversight of the corporation’s activities. To be able to do this, many Crown corporations’ boards voluntarily adopt a “board charter” – a board-approved document that outlines the processes and structures established to manage the corporation’s business in order to meet its mandate. In addition, many Crown corporation boards also choose to adopt “committee charters” for each of their board committees.

A Crown corporation board of directors usually establishes a number of committees to undertake substantive work in support of its responsibilities. The requirement for, and use of, committees varies widely among Crown corporations. Because the board as a whole remains accountable for any decisions made by its committees, it is recommended that the relationship between the full board and any of its committees be clearly documented and approved by the board.

The documents that create a Crown corporation (e.g., its enabling legislation, letters patent, articles of incorporation), along with its corporate by-laws, may collectively be understood to form its charter, and often contain much of the information discussed in this paper. However, it is considered a good governance practice for the board to create a comprehensive document or set of documents that clearly outlines essential and related important information on the structure, process, relationships, roles and responsibilities of directors, the chair, the board as a whole and committees of the board. While the level of detail, language and format of any given charter varies according to the Crown corporation, boards are encouraged to ensure their charters are as comprehensive as necessary to be useful to all board members of that corporation. Notably, a charter does not have to necessarily include all items referenced in this document; however, board members are encouraged to fully consider the needs of their corporation.

3.0 Board Charters

A comprehensive board charter clarifies roles and responsibilities, specifically to include both the legal and managerial oversight roles of individual directors, as well as the collective roles and responsibilities of the board as a whole. The following sections recommend information to include in a board charter.

For Crown corporations that fall under Part X of the Financial Administration Act (FAA),Footnote 1 section 115 identifies the basic legal roles and responsibilities of directors. Section 115 provides that every director and every officer of a Crown corporation in exercising their powers and performing their duties shall:

  • act honestly and in good faith with a view to the best interests of the Crown corporation;
  • exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances; and
  • comply with Part X of the FAA, any regulations issued pursuant to it, the Crown corporation’s charter, the by-laws and any directive given to the Crown corporation by the government.

Section 122 of the Canada Business Corporations Act places a similar onus on directors on boards created pursuant to this statute.

Further, any enabling legislation of a Crown corporation may identify more specific legal roles and responsibilities of directors that could be referenced in the board charter.Footnote 2 Directors are also responsible for complying with any other laws and regulations that apply to the particular Crown corporation on whose board they serve.

3.2 Stewardship and oversight by directors

Subject to Part X, section 109 of the FAA, the board of directors of a Crown corporation is responsible for overseeing the management of the businesses, activities and other affairs of the corporation. Beyond their legal roles and responsibilities, individual directors assume the same responsibility for the stewardship of the corporation that lies with the board as a whole.

Specific stewardship responsibilities that might be described in the charter include:

  • participating in the board’s efforts to set and approve the strategic direction and the corporate plan for the Crown corporation;
  • identifying the principal risks of the corporation’s business and ensuring appropriate systems to manage these risks are in place and operating;
  • approving management’s human resource and succession plans including appointing, directing and monitoring senior management;
  • ensuring the corporation’s information systems and management practices meet its needs and provide confidence in the integrity of the information produced; and
  • advancing a cohesive approach to board development, board integrity, board evaluation and expected level of independence from the corporation’s management.

3.2.1 Strategic direction setting and the corporate plan

Approving the strategic direction of the corporation is generally recognized as a primary responsibility of the board. Management normally formulates the strategic direction and the corporate plan for the corporation (often following initial board direction); the board’s responsibility is to assess and challenge management’s proposals. To fulfill its FAA section 115 duties, it is critical that the board be satisfied with the corporation’s strategic direction, as stated in the corporate plan before approving it.

The benefit of a board charter is that it can clarify the board’s role with respect to how it will:

  • review and assess the pursuit of any public policy objectives of the corporation;
  • consider any trade-offs and tensions between the policy and commercial objectives of the corporation, when such exist;
  • assess the relevance of the corporation’s mandate, and, where appropriate, propose changes for the responsible minister’s consideration; and
  • communicate to the minister, through the chair, input to, or feedback on, the ministerial letter of expectation.Footnote 3

3.2.2 Risk identification

A board charter can also clarify that safeguarding the corporation’s resources will likely involve the greatest portion of the board’s time. Under section 109 of the FAA, all major decisions involving the corporation’s assets and their financing need to be reviewed and approved by the board. The board will want to ensure that systems are in place to monitor and manage effectively the risks the Crown corporation faces in seeking to fulfill its mandate, including financial, business, mandate and operational risks. Further, the corporation also needs to reduce any potential risks associated with the inappropriate treatment of employees.

In addition to the risk-related responsibilities identified in sections 3.1 and 3.2, it is recommended that a board charter set out that it is the board’s responsibility to:

  • promote a culture of ethical and professional conduct;
  • develop, and monitor compliance with, a clear code of conduct for board members so that ethical standards and values are observed; and
  • ensure the corporation discloses how fully this code of conduct is observed (in the annual report).

3.2.3 CEO performance management and succession planning

The board charter can outline the board’s process to review and approve the corporation’s management succession plan. A succession plan dealing with the appointment, training, assessment and motivation of the corporation’s management team helps to ensure that skilled management will be available for the ongoing fulfillment of the corporation’s mandate. In conjunction with the CEO, the board will want to ensure an appropriate allocation of responsibilities between the board and management.

As part of its responsibilities under Part X of the FAA, the board is also responsible for monitoring senior management by ensuring the CEO is meeting the objectives assigned to him or her by the board.

In this capacity, the charter can provide clarity that the board will:

  • develop a succession plan dealing with appointment, training, assessment and management of the management team;
  • identify the skills and characteristics it deems essential for the position of CEO relative to the performance of the corporation and the major issues, risks and challenges facing the corporation;
  • develop or confirm a position description for the CEO;
  • establish, in discussion or conjunction with the CEO, a set of challenging corporate objectives for which the CEO is accountable (typically as part of a performance agreement including performance indicators); and
  • evaluate the CEO’s performance annually against the duties and objectives established by the board and the CEO at the start of the year in accordance with the Privy Council Office guidelines on the Performance Management Program for Chief Executive Officers of Crown Corporations.

3.2.4 Information management and integrity

To formulate the corporation’s strategic direction and hold management accountable for achieving its objectives, the board requires specific types of information. Ideally, the board would discuss and define with management parameters regarding the quality, quantity, timing and frequency of the information it expects to receive. By ensuring the integrity of the corporation’s information systems and management practices, the board helps to ensure that the information it subsequently provides to the government through the responsible minister accurately reflects the corporation’s state of operations and future directions.

A board charter can clarify that, in assuming these responsibilities, the board of directors will:

  • ensure the corporation’s reports adequately communicate the significant issues confronting the corporation (i.e., corporate plan and annual report);
  • ensure that information provided to the Crown is sufficient to allow an evaluation of how well the corporation has fulfilled its objectives; and
  • report results-based performance information on public policy objectives.

3.2.5 Board independence

Under subsection 105(2) of the FAA, an effective board of directors needs to have the ability to function independently of management influence. The board charter can outline the structures, processes and procedures that will be put in place to allow directors and the board to maintain this independent perspective.

Specifically, it is recommended that the board charter provide clarity that the board will:

  • in conjunction with the chair and CEO, develop position descriptions and desired skill profiles for board members;
  • assume responsibility for the corporation’s overall governance practices;
  • establish a procedure for the board to meet without members of the management team; and
  • meet occasionally without the CEO to discuss sensitive issues in camera (e.g., to address an evaluation of the CEO’s performance).

3.2.6 Board development

Assessing the contributions of individual board members is important if boards are to improve their effectiveness and fulfill their responsibility for renewal. Such assessments also assist in identifying opportunities to improve practices or identify skills and knowledge that need to be added to the board or its committees. The charter can address the need for directors to receive orientation or pursue continuing education or training, thereby enhancing their effectiveness and contribution to the Crown corporation.

It is recommended that the board charter provide clarity regarding expectations to support board effectiveness by requiring the board to:

  • participate in a process to annually evaluate the effectiveness of the board, its committees and individual directors;
  • be aware of directors’ ongoing education and training needs and ensure the requisite skills and education are acquired;
  • ensure all new board members participate in Canada School of Public Service (CSPS) formal programs covering corporate governance, financial literacy and how government works; and
  • assess the renewal of the board, its performance, the education program for directors and the administration of corporate governance.

3.3 Roles and responsibilities of the chair

It is also recommended that a board charter describe the roles and responsibilities of the board chair, which extend beyond those identified for directors. The chair’s main responsibility is leading the board, ensuring that the board functions properly and that it acts in the long-term best interests of the corporation. This requires a considerable commitment of time and effort, as the chair is the board’s primary contact with the corporation and with the government through the responsible minister.

3.3.1 Leadership and direction

The board charter can articulate that the chair provides leadership in managing the board’s affairs, including ensuring the board is organized properly, functions effectively and meets its obligations and responsibilities. The charter can express that, in so doing, the chair:

  • manages the regular activities of the board, such as:
    • scheduling board meetings and setting the agenda;
    • presiding over board meetings;
    • ensuring senior management and others attend board meetings as appropriate;
    • facilitating the delivery of accurate, timely and clear information to the board to enable it to successfully carry out its responsibilities;
    • assigning tasks to other directors and board committees; and
    • participating as appropriate on board committees.
  • serves as leader of the board;
  • supports and encourages board members’ participation in basic training, such as courses offered by CSPS;
  • ensures that all members appointed to board committees have the required skills/knowledge (i.e. audit committee members are financially literate and the chair of the audit committee is a financial expert);
  • encourages the participation and contribution of directors;
  • ensures information flows between meetings and provides feedback to directors;
  • works with the chairs of board committees to assist them in carrying out their responsibilities; and
  • acts as a liaison and maintains communication with all directors and board committee chairs to optimize and co-ordinate input from directors and board committees.

3.3.2 Communication with the minister and other interested parties

Open and regular communication between the chair and the responsible minister ensures that the minister is apprised of the corporation’s ongoing development. The chair is the minister’s primary contact within the corporation and the channel through which information from the minister’s office should flow to the corporation. Regular communication with the portfolio deputy head also ensures the flow of information from the government.

The charter can provide clarity that, in assuming the above responsibilities, the chair plays a role in each of the following examples:

  • ensures that appropriate communications emanate from the board to the minister on an as-required basis;
  • represents the board in communicating with the minister on emerging issues such as those raised by a statement of priorities/ministerial letter of expectation;
  • consults with the minister on the corporation’s appointment needs and provides him or her with advice on the required skill sets for members;
  • keeps the minister informed of board membership changes (e.g., resignations);
  • submits CEO performance agreements and performance evaluations on behalf of the board to the minister; and
  • acts as a co-spokesperson for the corporation, often sharing this responsibility with the CEO of the corporation, in its dealings with government representatives, the media and the public, as well as with Canadian and foreign private sector partners and stakeholders (in accordance with the corporation’s communications strategies).

4.0 Charters for board committees

Crown corporation boards operate with an audit committee and, typically, an appointment or governance committee. Additional committees may be formed to address the unique operations and circumstances of the corporation. A committee’s charter serves effectively as its terms of reference and guides its operations. Committee charters may exist as stand-alone documents, but most often are developed in conjunction with an overall board charter. In some cases, explicit committee direction may be provided in the corporation’s by-laws, and in such cases there may be no need for specific additional committee charters.

The following are typically included in committee charters:

4.1 Guiding principles

  • Committees are accountable to the board; the board has responsibility for the management of the business, activities and other affairs of the corporation.
  • Free and open communication is required between a committee, management and any other key participants/resource groups relevant to the committee’s work (e.g., external and internal auditors report directly to the audit committee without management serving as an intermediary).
  • With the approval of the board of directors, committees may be permitted to retain outside counsel or other experts in support of their committee work.

4.2 Reporting to the board

It is considered good governance practice for committees to periodically report their activities to the full board. The board may also receive annual reports or summaries from committees on their activities, findings, conclusions and recommendations.

Such reports can incite useful discussions about the effectiveness of the committee. It is recommended that the committee charter be reviewed annually for appropriateness, and where desired, the committee concerned may be asked to present any recommendations for change for discussion and approval by the full board of directors.

4.3 Organization of the committee

Committee charters can provide clarity regarding quorum, the number of directors on the committee and their degree of independence from management. It can also identify how the members’ terms of appointment provide for both continuity of membership and the contribution of fresh perspectives through new members. Clarity can be provided within committee charters as to whether outside parties have the right to attend the committee’s meetings (e.g., external auditors). Also, the charter can confirm reporting relationships. In the case of an audit committee, for example, the external auditor and the special examiner are accountable to the board of directors, normally through the audit committee.

It is recommended that qualifications to sit on the committee be expressed in the charter. For example, in the case of an audit committee, each member’s financial literacy should be confirmed as a requirement (or, barring that, how a member will become financially literate within a reasonable period of time after appointment to the committee).Footnote 4

4.4 Work practices and processes

In consultation with the Crown corporation’s management, many committees develop work plans to guide them in carrying out their responsibilities. The work plan can identify specific responsibilities, timelines for projects and schedules for committee meetings. The work plan can also identify the type and quality of information required and who is accountable for providing this information.

Committees meet as required based on an agreed upon schedule; however, the right to call special meetings can be made available to any committee member, management or outside advisors (if applicable and if desired). In the case of audit committees, for example, committees normally meet separately with the auditors (internal, external, and special examiner), with and without management present, to discuss the results of their examinations.

In developing board and committee charters and putting in place the work practices and processes underpinning these charters, Crown corporations will create a solid corporate governance foundation which will enhance their overall governance capacity.

5.0 Conclusion

Discussing and addressing some or all of the above items in charter documents assist the directors of Crown corporations in understanding their individual and collective roles and responsibilities with respect to the corporation. The charter concept can be adapted to the needs of the corporation and can be updated as necessary to reflect changing circumstances. Formal adoption of any charter brings corporations in line with best practices in governance already existing in a number of Crown corporations and endorsed by the government in its Review of the Governance Framework for Canada’s Crown Corporations – Meeting the Expectations of Canadians.

On a final note, board members are reminded that charters are not legal instruments and thus are intended only to outline useful information for the board. When adopting such board and committee charters, corporations will always need to be aware of the potential for misinterpretation or information conflicting with legal instruments, since the latter define the ultimate parameters under which the organization must operate.

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