Corporate governance in uncertain times

Kathleen: Good afternoon and welcome to Gowling WLGs webinar, Corporate Governance in Uncertain Times. After a couple of months of managing through the initial repercussions of the pandemic, boards of directors accepted that uncertainty is sort of the new normal. They're now asking what's next. Our seasoned practitioners and guest panelists are going to cover some key topics of interest for directors today. But before we turn to our panel, I just wanted to note that Gowling WLG has already hosted several webinars relating to the impact of COVID-19, in terms of what it's had on M&A transactions and also on financing activities. We've been at this now for a couple of months. We've listed our past webinars on some of these slides and if you missed any of them we do have them on demand. We have versions of those on our website and you're welcome to go take a look at them there. We have a couple of housekeeping points. You can ask questions throughout the session. There's a Q&A button at the bottom of your screen. We will try to answer your questions towards the end of the session and obviously you should feel free to reach to any member of our team afterwards as well. This session is being recorded and it's going to be posted on our website in a couple of days. Now, obviously this presentation is being put on by lawyers and we'd be remiss if we didn't have a disclaimer. We're going to give you a high level overview today. It's for general information purposes only. We're not giving legal advice on a webinar. For specific advice relating to the topic we're discussing today please contact your legal counsel. As you know the situation's extremely fluid and changing daily. Just the stock markets show that. Information in this presentation reflects the laws and other standards that are in effect as of the date of the presentation.

So, to our panel. We've got a good panel here today with extensive experience advising and working with boards of directors. First of all we've got Stephen Pike. He's a partner in our Toronto office and his practice is focused on providing advice on corporate governance, transactions, operational investment and risk management issues. He does work in M&A transactions, CSR, ESG, all sorts of different areas.

We've got David Cohen, who's a partner in our Toronto office as well, and he's the Leader of our firm's Financial Institutions and Services group. He practices in the area of corporate and commercial financing and restructuring insolvency law, in both domestic and cross-border contexts. He also coordinates our national distressed M&A practice and you may have noticed that we do have a session coming up on that topic as well.

We also have Greg Peterson, joining us from our Calgary office. He's the Head of our Corporate Finance, M&A and Private Equity practice in that office. He advises both public and private companies on many transactional matters and, in particular, he's acted as counsel to special committees of various boards of directors, and he's currently a director and has been in the past, a director and officer of several private and public companies.

Lastly, we're most pleased to have Deborah Rosati joining us today. She's the founder and CEO of Women Get On Board and she's going to be providing us with some perspectives from around the board room table. At Gowling we work very closely with Deborah and her team at Women Get On Board. For those of you who don't know it's a leading member based organization that connects, promotes and empowers women to join corporate boards.

My name is Kathleen Ritchie. I also advise public companies on M&A and corporate governance matters. I'm a partner in the Toronto office and the Head of the Business Law practice. I'm going to moderate the discussion today. We've got lots of interesting things to talk about over the next hour. My job is really to try and keep us on track and on time.

If we turn to our agenda for this hour, we're going to talk about some key corporate governance issues directors are facing today. How to approach being a director in uncertain times. The role of the board when the company is on the cusp of insolvency. Hopefully not many people are in that boat but it is certainly a concern. Setting up special committees and new challenges for the board and board decision making in the next phase of the pandemic. Of course we're going to try and talk about some practical implications and share some real life stories with you as we go through this. Just remember to try and share some of your questions with us and we'll address them at the end of the session. Let's turn to our first topic. How do you approach being a director in uncertain times? Including the duties and liabilities and critical priorities and deliverables. Stephen, why don't you start by setting the stage for our discussion. Can you give us a quick primer on director's duties?

Stephen: I'd be happy to. Can everybody hear me? That's great. I'm going to give you a quick primer. This could take a whole semester or more at law school but over the next few minutes I'm going to try and provide some context to what we're going to talk about. Directors have duties under the common law, and common law is laws really comprised of judgments in cases before courts, and directors have duties under statutory law. Those are laws that are passed by Parliament or Provinces or Territories. Example of a statutory corporate law is the Canada Business Corporations Act, the CBCA. That's a statute under which Federal Limited Liability corporations are incorporated and many corporate statutes across Canada, providing for the incorporation of for profit and not for profit corporations, have similar provisions. So today, in the interest of time, I'm only going to talk about the CBCA. Under the CBCA directors have a variety of statutory duties. Overarching duty is that directors have to manage or supervise the management of the business and affairs of the corporation. That's the overriding duty, and then in doing that directors also have to comply with the Canada Business Corporations Act, and no provision in a contract or any other arrangement can relieve a director from that duty or relieve a director from liability for breach. Directors also have fiduciary duties and not to engage in a conflict of interest with the corporation or to appropriate opportunities that belong to the corporation. Many of you have heard of the fiduciary duty of directors and that provides that every director, when they're exercising their powers and discharging their duties under the Act, have to act honestly, in good faith and with a view to the best interests of the corporation. The standard of care in which they exercise their powers and discharge their duties is a care and diligence and skill that a reasonably prudent person would exercise in comparable circumstances. So it's not a standard of perfection. It's not a subjective standard. It's an objective standard. The one takeaway from what I've been talking about so far is that the directors owe the fiduciary duty to the corporation and only to the corporation. They don't owe the fiduciary duty to the shareholders or to the customers or to the employees. It's only to the corporation.

So when directors are considering what's in the best interest of the corporation, what can they consider? Who's interest can they consider? In a number of cases before the Supreme Court of Canada in the early 2000s, the BCEs, the Peoples Department Store cases, you'll hear more about that later, but the court determined that boards, in deciding what's in the best interest of the corporation, can consider the interests of shareholders, of employees, of suppliers, of creditors, of consumers, of governments and of the environment. Those are called stakeholders. So the board can consider stakeholders in making its decisions and in 2019 the CBCA, Canada Business Corporations Act, was amended to put into statutory law what I have just explained to you, which came out of the BCE and other cases and so the statutory law, now, provides that when acting with a view to the best interest of the corporation the directors may consider, but are not limited to, the following factors: shareholders; employees; pensioners; retirees; creditors; consumers and government as well as the environment in the long term interest of the corporation. Now, that's a long list, and it's not intended to be exhausted, so directors then have the duty to try and balance and resolve competing interests of stakeholders, and they have to do that and consider the interest of stakeholders in a fair manner. So that's going to be an issue of process, very much for boards, in terms of how they deal with the interest of stakeholders, how they balance them, interests between stakeholders and the corporation, etcetera. Now when directors are making decisions they're making business decisions. They're not making legal decisions. They're making business decisions and what the court and BCE and other cases, a number of cases, have determined and developed is something called the Business Judgment Rule. That means that if the board makes a decision that the court will defer to it as long as it lies within the range of reasonable alternatives. So, as I mentioned a couple of minutes ago, the boards have this overarching duty to manage or supervise the management of the business and affairs of the corporation. So it makes a lot of sense that courts will not impose their business judgment. They will defer to that of the board as long as it's within the range of reasonable alternatives. As we'll hear, that boards can hire experts to assist them in that decision making process. Kathleen?

Kathleen: That's great, Stephen. Maybe you could just very briefly talk about liabilities of directors.

Stephen: I will do that very briefly because we could spend a whole afternoon talking about directors liabilities. In a nutshell, there's very broad and wide ranging liabilities for directors and corporations which I hope all of you who are directors are aware. They include personal liability for breach of duties under the corporate statute, for unpaid wages, unpaid vacation pay, pension contributions, employee source deductions, GST and HST collections and remittances. There's personal liability under securities legislation, occupational health and safety legislation, environmental legislation and on and on. We're going to talk about a number of these a little later in our program.

Kathleen: Thanks, Stephen. So why don't we turn to how things have changed in the past few months and how they might change for some companies in the future. In this part of the discussion what we're going to do is have Stephen give his insights but we're also going to get David's thoughts on the role of the board as we sort of shift into a potential insolvency situation. What we talk about being a company in the cusp of insolvency. So, Stephen, whether due to COVID-19 or disruptions, do directors duties change in uncertain times?

Stephen: In my view, directors duties do not change in uncertain times. I think what changes is the way in which directors fulfill those duties, and primarily in the working relationship between management and the board, because I think that changes as well. Classical corporate governance theory is that the board should be noses in and fingers out. We can call that corporate governance social distancing. But in uncertain times boards and management should not be social distancing. They should be building a more symbiotic and closer relationship so that businesses can take advantage of the expertise and experience of board members to support management and to optimize board effectiveness. Now, we know that directors must always act in the best interest of the corporation, but in uncertain times boards trying to determine what's in the best interest of the corporation becomes a much more arduous task. In my view, the best interest of the corporation is not static. What is in the best interest of the corporation yesterday, or a year ago, may be much different than what it is today or what it's going to be tomorrow. So the duty to act honestly, in good faith, with a view to the best interest of the corporation, that is mandatory and that doesn't change. As well, there's no holiday or abeyance or any other break in terms of dealing with the duties of the directors on an ongoing basis or critical board functions. Like risk oversight. Those continue. Kathleen?

Kathleen: David, what about when we head into the zone of insolvency? Do you see changes? Some of the cases that Stephen mentioned, what about stakeholders?

David: This is a conversation really about a fight that's happened and the courts already have been clearly decided. In the Peoples Jewelers in the Supreme Court of Canada, the court made it really clear that the directors of the corporation do not owe a specific fiduciary duty to creditors. That is a decided feature of Canadian law. It is at the Supreme Court level and so it is the law of the land. But the practical application of that is that, as Stephen said, it's all of these interests that under the statute you do have to give due regard to. What you have to remember is that in that zone of insolvency, when a company is approaching a serious liquidity crisis where it may or may not survive the crisis, the board of directors in exercising that fiduciary duty have to take extra care. Why? Because they're going to come under scrutiny. Because the decisions they make are going to be so critical to all of those stakeholders and because things like soft dealing become very apparent very quickly. They have to spend the time to understand how each of their decisions impacts each of those stakeholder groups. And, yes, the creditors are one of those stakeholder groups, and yes, they have to consider them. But after exercising that business judgment, that Stephen talked about, they can still make a decision that's in the best interest of the corporation that is not necessarily in the best interest of a creditor. That is really where we get into the difficulty. There's some other stuff that we're going to talk about a little later around the oppression remedy, where really egregious decisions that impair creditors may give rise to personal liability of directors, but in a nutshell that's what the directors have to consider. This added scrutiny extends fairly deep as well. Directors need to be documenting very carefully what they do every step of the way. They need to be recording the fact that they've taken these steps. They need to show the due diligence that they went through with the exercise should that ever arise in litigation at a later date. Kathleen?

Kathleen: That's great, David. So now we're going to talk about some examples of changes in how boards are fulfilling their duties and governing in these uncertain times but before we get right into that, Deborah, I thank you so much for joining us today. It's great to have you on board, so to speak, and to get your insights. I'm going to put you on the spot. From the perspective of a director what's the biggest change you've experienced in the past few months?

Deborah: I like to characterize it that there's really three phases that directors are facing during this pandemic. There was the response phase and that was really immediate, so I'll give you an example, and it's funny that it's falling on the heels of David's conversation. One of my boards, during the lockdown, we had restructuring advisors. We had employment advisors at the table that weekend to determine what we were going to do on Monday, the following day, to deal with response and runway and cash in situation and we did temporary layoffs. So that was a very immediate response. The second phase is recovery. What are you going to do in the recovery phase and I think I've been observing and learning and listening, a lot of companies are in the recovery stage. In the recovery stage you're thinking about your future, your runway, so it may be things that you're going to continue to reduce your costs structures, even on the response stage there was some immediate reduction in executive comps, directors comps, layoffs, etcetera, response. Are you going to get to the other side of this? What do you need to do? So a lot of scenario planning and then the third phase is not a lot of companies are there yet but how do you thrive? So I think you have to deal with it in those kind of phases, and each one requires a different kind of lean in and a different kind of guidance from the directors, and oversight at all times throughout. It's about governance process so you've always have to keep that hat on.

Kathleen: So just quickly, would you say you've had more meetings in the last few months as a director?

Deborah: I probably have a board meeting every night, or one or two on a weekend, easily. I say it's lean in all the way. I tend to be on small cap boards so small boards, got to be really agile, so it's not for the faint of heart in any way.

Kathleen: Okay. So, Stephen, can you maybe provide some examples of how boards are fulfilling their duties and governing in these times? Some of the deliverables that they have. Their priorities.

Stephen: Sure. Sure. Well taking a step back, the way in which boards typically fulfill their duties and deliverables is done in a highly planned, at least scripted granular and structured manner. Reminds me of the book 'Thinking Fast and Slow'. So it would be hard to find an example of something else that's so highly planned, scripted and structured other than maybe a pilot's pre-flight checklist. But directors meetings are proactively well planned, well organized, well timed, methodical, comprehensive. Generally same agenda items year after year. It's almost like ... Strategies are developed, plans are followed, performance is measured. As Deborah alluded to, in terms of what she's doing every day, in uncertain times it can be the exact opposite. The governance process can become intense and react. So priorities are constantly shifting. Directors are now being forced, as Deborah said, to make decisions in compressed timeframes with less, or incomplete, or inaccurate, or ambiguous information that makes the dynamic legal regulatory landscape with rules changing all the time. When boards have adjusted the way they operate, the way they determine priorities, fulfill their duties, they're always considering the best interests of the corporation. I think that boards now need to remember the old carpenter's adage: measure twice and cut once. Because in the current uncertainty the board might never get a second change or an opportunity to recalibrate the original decision that the boards making. Boards are having to move and make the decisions on the fly. There's new priorities such as the health and safety of our employees comes first. That's a priority that we didn't talk about a year ago and the deliverable that the boards have to manage. Anyone here a year ago of a board agreeing to send the entire workforce to work from home? No. I didn't think so. How about pivoting to make and sell sanitizers instead of beer? No. We're turning over production facilities for high end fragrances to produce hand sanitizer to be distributed at no cost to health authorities as LVMH the global luxury brand leader did. Or how about providing a royalty fee licence to use the confidential patented specs and software codes for commercially produced ventilator as Medtronic recently did? Boards are thinking about their corporate purpose and how they're serving the communities in which they operate and then making decisions based on that consideration. Kathleen?

Kathleen: Thanks, Stephen. David, can you comment on what things look like for a company that might be facing possible insolvency?

David: Sure. You know the two comments that rang in my ears from Stephen are measure twice, cut once and Deborah's commentary about runway. Cash is king. Financial covenants in a credit agreement, and they all have nice sounds, tangible net worth, covenants, etcetera, they don't matter. Cash is king. So your cash flow is what you have to be worried about. Before you can determine what you're going to do you have to figure out how long you're going to survive. Then you have to find a way to survive longer. Rule of thumb is in solvency we try and develop 13 week cash flows, well if you'd develop a 13 week cash flow at the beginning of COVID-19 you would have been out of cash last week. You have to come up with different plans associated with how you're going to deal with your cash flow. So the boards have to look at cutting their fixed costs, cutting their variable costs. They need to look at the emergency support programs for Government. They need to look at their lenders for a source of capital. They need to look to equity holders for a source of capital and then of course, in small businesses, friends and family. Without that you can't develop the proper cash flow that's going to allow you to survive 26 weeks, not 13. 36 weeks, not 13. Why do you do that? You need to know, from my perspective as an advisor in insolvency to boards, is you need to know where your end game is going to happen. Because you can't trade while your insolvent. What does that mean? If you know that you run out of money on Wednesday and you're going to have employees working for 2 more days, Thursday and Friday and then you'd shut down, you've hung your employees out for 2 days of wages that you don't have in the can to pay them because it's in accrual. Other accruals. The director and officer's liabilities. If you're a director on a board you want to know that your management team has effectively provided for all of the liabilities that could accrue to a director or officer are going to be addressed within that cash flow, in that time frame. You don't want the music to stop and have no place to sit in the game of financial musical chairs. We talk about, and I'm going to talk about these a little more in a minute, but wages and source deductions and GST and pension contributions. You have to take the measure of those. Some of them are paid monthly in arrears. Some of them are paid bi-monthly in arrears. You have to know when your insolvency, when you run out of money, is and you have to have an accurate assessment of how much these actually are. Companies make assumptions about what their severance liability is going to be and what their vacation pay liability is going to be. What the board should be thinking about right now is getting a financial advisor to scrub those numbers to make sure that when they land the actually don't run off the runway and end up causing director and officer liability. Then they have to decide when the game is up. What happens, it's a natural reaction to the troubled company, that you see senior executives in a company. They're out racing around trying to cut costs and find a capital infusion of a white knight or a savior or a government program savior or whatever it is. They wear these glasses, we call them rose coloured glasses at our end of the business, and at some point they have to take them off and people ask me, "When is that? Because the CEO is running around not talking about an insolvency filing. They're talking about something like I've got the money. I just need a little more time." I like to call it the difference between having a plan and having a hope. If the CEO of the company looks at the board and says, "I have a plan. We have 5 days. I've got three sources. Two of them are already confirmed. I need one more source to come along." you can probably run right to the edge of your being out of fumes on that kind. But if the CEO or CFO says, "Well, I hope to have the deal together." The moment somebody starts talking about hope, instead of a plan, you really need to be talking about preparing for a fall. By the way, the time period for preparing for the filing is actually about 4 weeks before that point because there's some financial work that needs to be done to know what kind of filing will be available to you, and you need help from both a restructuring lawyer and a restructuring advisory team for any size of business. That's going to help you either avoid the filing or land in the right place on it and not get yourself in trouble as an officer or director. Kathleen?

Kathleen: David, can you talk a little bit more about the liabilities that you've been mentioning?

David: Yeah, everybody knows these liabilities but the extent of them can be a little bit daunting. Wages, vacation pay, severance, commissions, expensary imbursement for itinerant salesmen, in certain circumstances. These are director liabilities and there is no due diligence defence to not paying them. So you can't rely on the CEO or the CFO of the company saying to you, as a board member, "We got it covered." You want to talk about nose in and fingers in? You've got your whole arm in that one. You are all the way in it and you are grabbing it and making sure that it's being properly addressed because it's your pocket that you're protecting. Unremitted source deductions. Again, this is what is done monthly or every 2 weeks depending on the way it's structured for the corporation, these have to be remitted. You know exactly what they are. They're very predictable and so they're not that hard to identify. Unremitted GST and HST. It's a guess. It's done 2 weeks in arrears. You don't know what your sales volume is exactly going to be in that 2 weeks but you've got a reasonable approximation of it and you have to make sure that you've made the right allowances in your cash flow, and if you intend to do a filing with that type of liability you need to pay it. If it's not due for payment until 4 days after the filing, you need to prepay it. That's something that boards don't think about all the time. That they actually need to prepay some of these priority payables before they go into a filing otherwise the wall comes down and they can no longer pay it because they don't have the ability to pay up fee filing debt. Pension contributions that are deducted from source. That's like trust money, folks. Officers and directors have to make sure that that gets remitted properly. There is no due diligence defence to that. Then we get into things like the oppression remedy. What is the oppression remedy? If you take an act as a board member, on behalf of the corporation, that is unduly, unduly, whatever that means, unduly prejudicial to the interests of, and I'll just say creditors because that's who's going to be at stake here, unduly prejudicial to the creditors they can actually bring a proceeding against you under the CBCA or the Ontario Business Corporations Act, or the Canadian Business Corporations Act, to find you personally liable for the oppressive conduct. If you've done your job in the fiduciary stage the way Stephen described it, and you've ticked all the boxes and used the judgment rule, you're probably okay but you should be passing it by before you pull that trigger. Dividends while insolvent. That's an easy one. If you're going to let money go out to your stakeholders, to your equity holders in the zone of insolvency, you're insolvent when it happens, you are personally liable for those dividends. That's an open and shut very easy one. That includes redemptions and repurchases of shares from equity. A breach of trust. If you are actually responsible for trust funds and those trust funds get dipped into for corporate purposes you're going to be subject to a breach of trust litigation claim. Piercing the corporate veil. This is a really high standard claim to make. It's very hard to prove a pierce in the corporate veil case. However, on the eve of insolvency directors and officers sometimes do things like allow the family cottage to be moved out of corporate ownership into personal ownership, so on top of the fraudulent conveyance legislation and the insolvency legislation that can attack it, they can be attached personally because it's that tort. That tort of fraud that you can get dinged with that will actually prevent you from being able to uphold that transaction. The transaction can be reviewed. It can be reversed or you can be held personally liable for it. Straight up misrepresentations. If you go out and you start telling lies to people in order to induce them to deliver supplies to the company, or to advance credit to you, there's a really good chance you'll be sued for the misrepresentations. That's just the beginning but that's what I'll end with.

Kathleen: Thanks, David. That's helpful. We're going to talk a little bit more about the personal liability and how to mitigate it, aside from fulfilling the fiduciary duties. Deborah, sort of just to put you on the spot, what's the most important thing to you in terms of managing your personal liability as a director?

Deborah: Listening to David I'd run away. So how do I mitigate that? I think I like to break it into three stages. There's doing your due diligence before you join a board. There's continued due diligence while you're on the board and then understand what happens when you leave the board. In all of those you want to ensure you have protection. You have directors and officers insurance. You also have indemnification and, again at the end of the day, the discussions that are going on in this panel discussion is really about making sure that you've got good due diligence, good process from a fiduciary perspective. I think for me, as I evolve in my own board journey, I think of those, I ensure that those ... and it's ongoing review process too from your insurance. It's not something you just enter into. You have it and you dust it off. It's an ongoing review. Also if the company changes or goes into new jurisdictions, or new areas of business globally, what's the impact? Do you need additional insurance size? Obviously it's an ongoing process to review. My two is do you know insurance, if the company doesn't, do you know insurance? I don't think you'd be entertaining it and then ensuring that it's appropriate. Also ensure that if there's any claims that come to the company that your insurer's notified of that. So as a director you need to always have that on the agenda to make sure that management is advising you and updating you on the status, if there's any outstanding claims.

Kathleen: That's helpful. Thank you. Stephen do you want to sort of flesh some of that out in terms of other things that directors do to mitigate their personal liability?

Stephen: Sure. I'd be happy to. We could go on for quite a long time but to the big picture, the directors in terms of mitigating personal liability, you have to continue to do the job of being a director. You have to prepare for board and committee meetings. You have to attend them. You should be asking questions and participating actively. You should be making sure that delegations of authority to management are appropriate and within the bounds of bylaws and articles, etcetera. If needed set up a special committee, as Greg's going to discuss later, to handle specific matters so that there's adequate oversight of certain things going on within a business. Ensure, especially today, ensure that virtual meetings are being properly minuted and that records are being kept. Sometimes those things can slip, and as David mentioned earlier and as Deborah mentioned, you've got to make sure that there's a record of decision making during uncertain times because it's those decisions that will even be more highly scrutinized than in what's called certain times, if we can use that term. Ensure that compliance systems within the business and corporation are functioning. Obtain regular certifications from management, and at the board level, take all reasonable steps necessary to comply with, or ensure, the company is complying with legal and regulatory requirements. It has to be a board agenda item. Avoid conflicts of interest as I mentioned before. Make sure that you're fostering disinterested decision making. It doesn't mean your bored. It means that the directors don't have a personal interest or self-dealing with corporate opportunities. Take advantage of using professional advisors where the board or directors feel they're necessary. Under the Canada Business Corporations Act there's a provision that says that a director is deemed to have complied with her or his fiduciary duties under the Act. The director relies in good faith on the financial statements of the corporation or a report of a person who's profession lends credibility to the communication with a report. So boards should take advantage of that. I think the other thing I'll mention in terms of indemnification, as Deborah mentioned, there are indemnification provisions in corporate bylaws. Directors should be aware of that and have them available, the most recent versions. If there's an indemnification agreement the directors should have that in their possession and should review it. Should know that no corporate indemnity will be available unless a director has acted honestly, in good faith with a view to the best interests of the corporation. I won't call them conditional but the law has certain requirements. To Deborah's point about directors and officers insurance, I would say, as Deborah has said and I completely agree, that people, many directors forget about them. They think they're there and they're fine. Here's some questions that you should be asking on your board. Has the board received confirmation that the D&O policy is in full force and effect. That the policy's in good standing. That all premiums for the current period have been paid in full. To David's comment earlier about payments before and after insolvency, you want to make sure that your D&O insurance is paid up. Understand when the current period ends especially as you're doing scenario planning on a going forward basis. Find out from management has the D&O insurer given notice of non-renewal? Or notice of any changes to any of the terms of the policy where the coverage is thereunder or any limitations that they've put forward. Directors need to know, as Deborah said, they need to know, must have details of exactly how and when a claim can be made under the policy. You can't rely on others to make that claim, if you feel that a claim needs to be made, so get that information in advance. The last thing I'll say about D&O insurance is something that David alluded to and I've seen it with various corporations, not any that I've sat on a board of, but where directors have had the D&O policy, it's been there for a long time but the dollar amount of coverage is not in sync and not aligned with the potential liabilities that directors and officers are facing. So you've got a policy. It's in good standing. The premiums are paid up but when you do the calculations that David's talking about, which is scoping out the quantum of directors potential liabilities, D&O insurance is way too low. So that's something that I highly recommend that board members keep an eye on. Then as David had discussed, and we'll hear a bit more, make sure that potential contingencies, emerging risk and potential insolvency filings are being examined. What I said, was a long way of saying, everything that Deborah said. Back to you, Kathleen.

Kathleen: Thanks, Stephen. We're going a little bit over time. I wanted to give David just one last second to, I think he had one other point on insurance, that you wanted to talk about in insolvency context.

David: I have two points. The first one is an indemnity is not worth anything if the company's insolvent. If you're counting on your indemnity and the company's insolvent you're going to be out of luck. On policies, this is what I would call an insolvency hack for people out there. This is something you should do. Go and check your policy and see if it's a currents based policy or a claims paid policy. Currents based policies you can claim after the policy period ends for an event that occurred during the time of the policy. But a claims paid policy you have to make the claim while the policy is still active. If the policy is terminated, or if you failed to renew it, you can't make the claim outside the policy period and you have to do something called purchasing a tail on the policy. You need to do that before you file for insolvency in debt as well. That's just one more little thing that you absolutely need to take care of.

Kathleen: Thank you very much, Stephen and David. We're going to turn it over to Greg to talk about special committees now, in uncertain times. Maybe, Greg, if you could just introduce what special committees are.

Greg: Sure. Thank you, Kathleen. So first off, board committees can be classified or categorized as either a standing committee or a special committee. Standing committees are the typical committees that we always here of such as the audit committee, compensation committee, the corporate governance committee, health and safety committee if you're an energy company, or reserve committee. Standing committees are established to deal with ongoing matters such as the audit or compensation matters and they're governed by a charter that's usually already in place. In contrast to standing committees we have special committees. Unlike standing committees special committees are committees that are established more on an ad hoc basis and established to deal with a particular issue or situation that's developed in the company. Unlike a standing committee a special committee usually doesn't have a charter mandate already in place. An issue arises, special committee is established to specifically address that issue and then the charter's put in place. I can get into a little bit later what could go into the charter, but with regard to who should be on a special committee, those members should be two things. Number one, they should be independent. Number two, they should be disinterested parties with respect to the matter at issue otherwise the work of the committee would be vulnerable to attacks regarding the committee's objectivity or impartiality in dealing with the conflicting parties. There's numerous cases out there where special committee processes have been rejected by the courts because the committee members were, from the start, not truly independent nor disinterested. So in summary, a special committee's a sub-committee of the board, formed on an ad hoc basis, or formed for a special or immediate purpose. It's comprised of members who are independent and disinterested and it's purpose is to provide the board with counsel and direction on the particular issue that's developed. I think the thing to keep in mind is that the real underlying purpose of a special committee is to ensure that the board is fulfilling those fiduciary duties, just talked about by Stephen and David, in response to an issue, a situation, a problem or circumstances that's arisen in the company. Kathleen?

Kathleen: That's great. So could you talk about when a special committee should be established and maybe give us a few examples?

Greg: Sure. First off, Canadian law doesn't expressly mandate when a special committee must be established. Generally for any significant board decision a special committee should be considered, and because of the potential of scrutiny of that board decision, that decision should be preceded by a board process that shows that the board properly complied with its fiduciary duties. The benefit of a special committee review into a board decision making process is it lessens the ability for any challenge of that process. So with regard to when should it be struck up, on the one hand a board wants to ensure that the committee's not established too prematurely given the potential for additional costs involved, and second, the disclosure issues that arise. When you establish a special committee there's costs. Members of your committee generally are going to receive additional compensation due to the additional time and effort they're going to put forth, and an appropriate special committee process also typically requires that the committee be empowered at the expense of a company, independent legal, financial, and other outside experts to assist them. So you have some costs when you set up a committee. On the other hand a board doesn't want to wait too long and not establish a committee where alternatives start to become limited or in hindsight the ultimate recommendation of the board is perceived as being kind of a foregone conclusion. Unfortunately like many board decisions, I don't want to give you the lawyer answer, but it's a matter of judgment as to when a special committee should be established.

Kathleen: ... when a special committee should be established?

Greg: Well, there's basically three main ones. The most common fact situation for establishing a special committee is when there's a conflict of interest situation. A typical example is going private transaction. I was, just last year, at the end of the year, special counsel to a special committee when one of the directors and management were involved in the buyout of the company. The decision as to whether to go forward with the transaction that involves a conflict of interest should be made by independent directors of a special committee in order to provide that procedural safeguard to ensure that the decisions made by individuals whose judgment's unclouded by outside interests or considerations. So that's number one. Number two, another fact scenario given rise to special committees is to investigate or determine an inappropriate response for any alleged internal corporate wrongdoing, whether it's financial or otherwise. I was counsel to a special committee several years of a company that had an alleged financial impropriety by its founder, its largest shareholder, its most dominant director and the chairman of the board. So the board in that company established a special committee to handle that difficult situation without any undue influence from this influential stakeholder of the company. The third common reason you establish a special committee is to ensure that the board's properly discharging its fiduciary duties when dealing with a crisis, such as we have today, with COVID-19. With COVID-19 we're seeing that company decisions, as Deborah has said, having been made on a daily basis to adjust to the rapidly changing considerations, including the guidelines of health organizations and governments and establishing a special committee may be the only way to help a company kind of guide its way through those choppy of COVID-19.

Kathleen: Why don't we speak to ... ... I apologize. I have an echo from something. I think it's Greg's computer but why don't you just skip quickly, Greg, to what you're seeing with actual special committees being established in connection with COVID-19.

Greg: Sure. With large cap companies, many of those companies already have what's called a risk committee. So what I'm seeing is that these companies are mandating their risk committee to oversee the company's response to the pandemic. The large companies that don't have a standing risk committee are establishing a special committee ,and those committees are holding daily meetings, and they're also looking at what their other companies of similar size and nature are doing. Now with regard to small or mid cap size companies, I don't see them establishing special committees as much. A lot because of the cost, the resource, limitations. But what they are doing is that it's resulting in these multiple task of companies that are spreading the risk to their standing committees. For example, the financial and accounting risk are being handled by the audit committee. The oversight of governance and reputation risk are being delegated to the governance committee and compensation and employee benefits are being handled by the comp committee. I'm also seeing a lot of mid cap companies establish special committees with one member of each of the standing committees, comprising the special committee. So that's what I'm seeing out there right now.

Kathleen: That's helpful. Thank you, Greg. Were getting closer to our time, our hour being up, and I want to move to our final topic. Deborah, you already took us through the three phases that you've sort of seen, so why don't we just sort of skip over to what are you hearing from boards and around the boardroom table about sort of the issue of return to work, or the workplace? Because we're all working. Trust me. We're all working really hard.

Deborah: And then some. I think some of the issues that are coming up are mental health and mental well-being because there's really not this divide between home and work balance. There's the engagement working virtually. Really kind of when do you return? I think there's the concern you can't force people into returning, especially if you're not a frontline or essential service, and if you are working from home how long does that extend? In that extent, the board itself are all doing virtual meetings. The conversations about AGMs. Are they virtual? Are they hybrid? Extended deadlines for AGMs. So lots of concerns. Lots of unknowns. I think people are being agile, being adaptative, but I think there is a concern especially for millennials. There's a conversation that you've got a lot of them in 400 square foot offices, or condos in Toronto, they can't go to their offices and they're 28 years old and what do they do? So I think there's health, safety and mental well-being, I think, and there's no one right answer as to when is the appropriate time to return. I think there's conversations about a phased in approach. I think it's regional based, Provincial based. Some Provinces that have opened up their restrictions, a little more so than Ontario, and so at the end of the day I think you have to be safety comes first and I think as board members you want to get that update from management and you want to be tracing the cases and contact. There's a new term that I've heard recently and it's really to do with the low touch economy which means it's going to be low touch. Everything you're going to do is going to be really contactless and low touch and it's going to have ramifications beyond COVID-19. Kind of where are we going into the future. No definitive answer and it really depends on the company.

Kathleen: I think it's the kind of thing that you're going to get some advice on obviously.

Deborah: Oh, yes. It's kind of requirements and how do you manage it? I think you have to manage it with real thoughtfulness and respect.

Kathleen: Yup. Yup. Then maybe some of the other things that you're thinking about as you move into this sort of, from the second phase to the third phase, trying to get through the initial repercussions but and now move towards what I think you were calling about the opportunities and trying to thrive. What have you sort of seen in that regard?

Deborah: Kind of coming back to, and I know David hit on it as well, is that whole runway. So you want to extend your runway. If you know your revenues are down by X percentage, you know you've gone for all the relief programs, rent relief, whatever it is and the impact it has on your business and you don't have certainty on your future revenue streams, you want to manage, you want to mitigate your liabilities, your exposures. You're going to do scenario planning. You're going to do scenario A, scenario B, scenario C. If you're global, a lot of impact on just travel, supply chain. So there's a lot of what if scenarios that are going around. I don't think anybody has the right answer but those are the questions you should be asking. For one of my boards we're doing weekly cashflows. We're monitoring that. We're ensuring we've got coverage directors liability, remittances, etcetera, so you really are leaning in depending on the size of the company and the situation. But you know what? Like I said, it's not for the faint of heart and you really do, I think as David said, arm in all the way right now.

Kathleen: But also are you finding that you've gotten to the point yet where you can sort of step back? Because this a new world, and you probably had a board retreat in January or February, and you figured out your strategic plan and now that is ...

Deborah: We did in December and then January came. So we're ready to go into the year finalizing the budget, budget being finalized and then Boom! right in the midst. So really course correct right away and making some very dramatic decisions within sort of week one, for sure. Another one, a few weeks later, you realize the impact was a little bit more severe than you thought. So it's an ongoing process. You've got to stay ahead of it. You can't be behind that.

Kathleen: Yeah, and at some point you also have to take a step back and think about where are we going to be a year from now.

Deborah: Absolutely.

Kathleen: You mentioned earlier management compensation. Can you give us a little bit more colour on what you're seeing around that?

Deborah: There's definitely, and I think you'll see there's a lot of data coming out now, but there's definitely right away if you're extending your runway and you're laying off employees, you have to hold the mirror up to yourself from an executive team. Reductions, some 10, 15, 50 percent. It's been publicly disclosed those types of announcements. Boards taking reductions and fees. You can't ask management to do a reduction and as a director sit back and not make a change. Another board that we're on, we're deferring completely our fees and having the real conversations with management. Look, you've got this balance scorecard that we prepared for the upcoming year. We can't evaluate on that. Things have changed and so maybe more of it's milestone based of getting you through this recovery period and transactional work that's happening. There was a lot of activity going on and, Kathleen, I know that you would know that and your colleagues, there's a lot of opportunities out there and cash is king. If you've got the runway then you're in a very attractive position to be looking for opportunities to acquire.

Kathleen: That's absolutely correct. I think we're just about at the end of our time. Deborah, just maybe, any final tips for, I dare say, sort of pivoting towards optimal board composition and effectiveness in these times?

Deborah: Oh good, I was hoping you'd ask that question. I have four B's. Be innovative. Be inclusive. Be diverse and be digital savvy.

Kathleen: <laughter> Yes. I don't think anybody imagined how much Zoom we would use. I actually, interestingly enough, knew how to use Zoom because I was on a board. It was actually a not for profit board and for the last 3 or 4 years we've been using Zoom for director meetings. So this wasn't new to me but obviously it is new to many, many people. We have a few questions. I think they're more D&O related. It looks like one of them we've already answered. I think somebody's also asking the question just of whether there are some differences in liabilities for public versus, or corporate I think you mean, or not for profit boards. I think you'll find that if you look at the corporate law statutes and the common law the duties and the liabilities for directors of both corporations and not for profits are quite similar. But we do have experts who help with not for profit boards. So I would recommend that you reach out to them and we're happy to put you in touch. There's also a question here about some more stuff around D&O policies and occurrence policies. Again, I think that's something that I don't profess to have the expertise on and I'm not sure that anybody on the panel necessarily wants to take that question. If there are any other questions, happy to entertain them now. I'll give people a second to add them. But if now we're coming up to our time. Does anybody on the panel have final thoughts that they want to share? Everybody's silent?

Greg: Good luck with your directorship. It's fun but it's also stressful but I think it's a very rewarding experience to be a director of a company and so good luck with it.

Deborah: I would echo that, Greg. As I said, you'd run away first but I didn't really mean that. I meant it in jest. It is rewarding and there's lots of opportunities but being able, we had 100 plus participants on this webinar so you can see it's an interest and I would say kudos to Gowling. I think you've been really instrumental in getting out there and educating directors on issues that they need to be thinking about during this pandemic. So thank you for the opportunity to be here.

Kathleen: Thank you, Deborah. With that we'll call this the end of the webinar and thank you to all of our participants for sticking around and listening to us and thank you to the panel.

David: Thanks for watching.

Deborah: Thank you, everyone.

Greg: Thank you.

Kathleen: Stay safe and healthy.

David: Take care.