Modern slavery in businesses and supply chains in Canada - Part three

Modern slavery and the shifting paradigm of corporate purpose and directors' duties

28 January 2020

In past years, modern slavery and other human rights issues have not been a critical focus of Canadian boards of directors. That's beginning to change. Underpinned by a renewed focus on stakeholder interests, such issues are increasingly becoming critical agenda items for Canadian boards of directors who have come to recognize their potential impact on the long-term performance and value of their businesses -- both from the perspective of risk oversight and value creation.

Corporate Purpose and Stakeholders

What's changed? Canadian boards are facing mounting pressures to address a broader range of issues in light of a burgeoning movement in American corporate governance urging boards to look beyond the interests of their shareholders. Indeed, while shareholder primacy has long been the legal bedrock of corporate governance in the US, two recent well-publicized developments suggest that boards are beginning to adopt a broader perspective in the exercise of their fiduciary duties.

The first of these milestones was the 2018 Larry Fink Letter to CEOs. In his letter, Fink, CEO of Blackrock, noted that companies must not only deliver financial performance but must also benefit all their stakeholders and demonstrate how they makes a positive contribution to society.

The second milestone occurred in 2019, when the Business Roundtable (BRT) issued a Statement on the Purpose of the Corporation, which was signed by 118 CEOs. In this Statement, the BRT explicitly rejected the doctrine of shareholder primacy and stipulated that "(w)hile each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders."

For many years, Canadian boards have had the scope to consider stakeholder interests. In the 2008 Supreme Court of Canada decision in BCE Inc. v 1976 Debentureholders, the Court recognized that the duty of the directors is to the corporation and only to the corporation. However, "In considering what is in the best interests of the corporation, directors may look to the interests of, inter alia, shareholders, employees, creditors, consumers, governments and the environment to inform their decisions." 

Long-term Interests of the Corporation

Following in the footsteps of BCE Inc. v 1976 Debentureholders, the Canada Business Corporations Act (CBCA) was amended last year to expressly provide that directors, in exercising their fiduciary duty to the corporation, may — although they are not required to — take into account the interests of shareholders, employees, retirees and pensioners, creditors, consumers and governments; the environment; and the long-term interests of the corporation. The permissive statutory inclusion of the interests of stakeholders within the consideration of Canadian boards should now provide a more direct channel for stakeholders to bring modern slavery issues onto the board's agenda.

I suggest that including "the long-term interests of the corporation" (and not the short-term interests of the corporation) is recognition of the place for environmental, social, and corporate governance (ESG) issues on the board agenda. Several leading Canadian investors (and many others) have themselves begun to put human rights and other ESG issues in conversation with their long-term corporate interests.

The Canada Pension Plan Investment Board, in its 2019 Report on Sustainable Investing, was explicit on this point: "We believe that strong human rights practices contribute to sustaining long-term value."

The British Columbia Investment Management Corporation similarly stated in its 2019 ESG Engagement in Public Markets report that "... we have chosen three areas that we consider to be long-term, widespread business challenges and therefore, a natural fit for an investor with an investment horizon that stretches forward many decades. These are: climate change and water, human rights, and governance."

As investors and other stakeholders (e.g., shareholders, NGOs, supply chain participants) continue to scrutinize what businesses are doing to manage human rights issues, directors in Canada, in turn, have been given more and more latitude to consider modern slavery issues in the exercise of their fiduciary duties. We can reasonably expect to see more Canadian boards viewing modern slavery issues in the same light as their investors — that is, as a long-term risk that must be addressed and properly managed.

Directors and Modern Slavery Legislation

Modern slavery legislation in the UK and Australia requires boards to approve annual mandatory public disclosure of modern slavery in the business and its supply chains, and outline the efforts the business has taken to address this issue. Although Canada currently has no modern slavery disclosure legislation, many Canadian companies and their boards are already complying with modern slavery legislation.

More on the global progress of modern slavery legislation will follow in Part 4.


Part 1: Introduction to modern slavery issues in businesses and supply chains in Canada

Part 2: Will Canada take legislative and regulatory action and how will it impact Canadian businesses?


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