BUSINESS

The boardroom exodus

Corporate directors are fleeing troubled companies

BRENDA DALGLISH September 14 1992
BUSINESS

The boardroom exodus

Corporate directors are fleeing troubled companies

BRENDA DALGLISH September 14 1992

The boardroom exodus

BUSINESS

Corporate directors are fleeing troubled companies

Richard McCloskey was two years old when miners moved the last load of ore out of the Matachewan gold mine near the small Northern Ontario community of Elk Lake in 1953. Now, McCloskey, 41, a junior resource promoter, is waiting for a court to sentence him later this year after an Ontario court judge convicted him of being partially responsible for the environmental damage

caused by a combination of the old mine’s waste pile, an unusually heavy rainfall and an ill-fated beaver dam. McCloskey and his father, Paul, were directors of Matachewan Consolidated Mines Ltd., which owned the mineral rights to the old mine property. The younger man’s conviction illustrates the new responsibilities—and potential dangers—faced by members of company boards.

The issue of director’s liability—the degree to which individual directors are personally responsible for their company’s actions—is hot and contentious. Within the past two months alone, directors of three major Canadian corporations, Peoples Jewellers Ltd., PWA Corp. and Westar Mining Ltd., have resigned because of concerns that they could be legally liable for millions of dollars worth of obligations to their

companies’ employees. In other cases, directors, including McCloskey, have been convicted of environmental offences, which often carry stiff fines and even jail sentences.

Directors, acting as the shareholders’ representatives, are, by law, the people ultimately responsible for a company’s actions. But, in practice, directors, who are usually paid only a few thousand dollars for their services each

year, often tend to merely rubber-stamp management’s decisions. Prominent individuals accept directorships because traditionally they have been considered an honor. In return, companies benefit from the experience and prominence of the directors they attract. The growing awareness of the extent of potential liabilities is causing some directors, even those whose companies have no immediate problems, as well as directors of charitable and cultural boards, to reconsider their willingness to serve. But others insist that directors must shoulder the responsibilities. Said Jerry Herlihy, a Ministry of Environment lawyer who has prosecuted directors: “If corporate behavior is going to be modified, it has to start at the top.” The recent escalation in actions aimed at directors is a result of several developments.

The severe recession has pushed many companies towards bankruptcy, and directors of financially troubled companies are more likely to be exposed to risks. As well, governments, employees and creditors are more aggressive about pursuing directors. And the legal responsibilities of directors have been growing slowly but steadily for 20 years. Robert Cranston, a corporate lawyer with Lang Michener of Toronto, says that he has counted more than 100 federal and provincial statutes that place a liability on directors for paying everything from the GST to vacation pay for employees who lose their jobs if a company reduces staff or declares bankruptcy. Ultimately, the directors could be forced to draw on their own personal savings and assets to pay the liabilities if the company cannot. Other legislation, particularly environmental laws, adds more responsibilities.

McCloskey’s case demonstrates the dilemma that directors face. McCloskey’s father, who was also charged but who died before the case came to trial, acquired the defunct Matachewan gold mine and tailings dump seven years after it had closed. Although the mine was played out, it is common practice in the junior mining industry for promoters to use such socalled shell companies for future development projects. The tailings spill occurred in October, 1990, after more than two weeks of heavy rainfall. A lake overflowed into the tailings dump, which then washed into the Montreal River. McCloskey says that neither he nor government mine inspectors and environment officials who had visited the property just three months before the flood, or even residents of the area, knew that a beaver dam had changed the drainage g pattern of the area, í Under pressure from the heavy ^ rainfall, the water broke through the g dam and caused the tailings dump—a “ huge pile of coarse sand left over from £ the ore-extraction process—to wash " into the river. McCloskey says that a house was flooded, a truck got stuck in the slide and residents of the area, who depended on the river for their drinking water, feared that the tailings contained toxic chemicals that contaminated the water. “It was a frightening thing and I would have been devastated if anyone had lost their life,” said McCloskey. “If we had known about the beaver dam, we could have blown it. But the tailings had been there for 40 years and no one realized there was a problem.”

Ultimately, however, the water was not found to be hazardous to the public’s health. James Deem, district officer with the Ministry of Environment in the Timmins district, said that the main problem was turbidity. The plume of sand took 40 days to completely move out of the river. Said McCloskey bitterly: “Essentially, I was convicted of muddying the water.” McCloskey has already paid $15,000 to-

wards repairing the damage and has agreed to a $400,000 lien against the property to cover damages. When he is sentenced later this year, he could be fined as much $10,000 a day for the length of the offence or even sent to jail. McCloskey chose not to accept a settlement offered earlier by the Crown prosecutor that carried a $5,000 fine. “It was the principle,” he said. “I don’t think that it is reasonable that the blame should all come back on me.” He added that although he could not afford a lawyer for the final proceedings, he hopes that the facts are compelling enough that the judge will suspend his sentence. As a result of the ordeal, McCloskey says that he has stopped working

on Canadian projects “until some sanity comes back into the system.” He is now working in South America and Africa.

In other cases, directors who foresee looming liability problems are choosing to head for high ground before the dam breaks. In Vancouver, Westar Mining Ltd., a nearly bankrupt coal mining company, had been negotiating with creditors in an attempt to survive. In late July, Westar’s six outside directors resigned because they said that they feared they might personally be held responsible for any unpaid pension contributions, wages and severance pay for employees.

On Aug. 24, the three remaining directors, who were also company employees, resigned. Said former president Lawrence Bell: “We waited to resign until what we considered was the last possible point when the company still had funds available to meet its obligations.” If they had stayed on, Bell says, he and his two colleagues could have been held responsible for paying subsequent wages. And that, just to meet the province’s employment standards legislation, could amount to several thousand dollars for each of the company’s 2,000 employ-

ees. Those costs, shared by just a handful of directors, could wipe out their entire net worth.

Within days of the first Westar resignations, the corporate blue-blood members of the board of PWA Corp., the parent company of Calgarybased Canadian Airlines International Ltd., stepped down from their positions on the boards of the corporation’s affiliated companies. They continue to serve as directors of the parent PWA Corp. The directors, including Quebec Senator Claude Castonguay, former chairman of the Laurentian Bank of Canada, Canadian Pacific Ltd. chairman William Stinson and former Alberta premier Peter Lougheed, resigned apparently because, like the Westar

directors, they were concerned about financial implications for themselves in the event that the money-losing airline went under. Lougheed, a lawyer, has an extra reason to be concerned: he is a member of 15 other corporate boards.

Then, on Aug. 27, five outside directors of Peoples Jewellers Ltd., which is losing money because of the failure of its U.S. jewelry retailer Zale Corp. and a slumping economy, walked away from their board. But, unlike Westar and PWA, Peoples devised a way to protect its directors. It arranged a financial trust, holding enough money to cover the obligations the directors could face if the company failed. The company then appointed new directors to replace those who had resigned.

Although the trust-fund solution appears to have worked for Peoples, it will not solve the problem for all companies that face similar dilemmas. “It is no panacea,” said lawyer Cranston. “If a company is in financial difficulty, the odds of it having enough available cash to set aside a trust fund to protect directors are not good.”

Nor would a trust fund solve the problem

faced by two directors of Bata Industries Ltd., the Ontario-based Canadian operating company of a multinational shoe manufacturer. In the Bata case, the Ministry of the Environment charged the two, who are also employees of the company, along with company chairman Thomas Bata and the company itself with failing to take reasonable care to prevent an unlawful discharge of waste. The waste included chemical additives for the shoe manufacturing process and cleaning solvents that had been accumulating in steel drums on company property in Batawa, in eastern Ontario, for at least two years.

Earlier this year, Bata himself was acquitted of the charges. But the Ontario Provincial Court fined the company $120,000 and the directors, Keith Weston and Douglas Marchant, $12,000 each. To the surprise and consternation of many corporate officers, Judge Edward Ormston added one final and important condition to the fine. He ordered the directors to pay the fines personally; he said that they could not be reimbursed in any way by the company for their expenses. (The decision is under appeal.)

Leslie Tenenbaum, Bata Industries’s secretary and assistant general counsel, ^ says that government offi§ cials set out to make an example of the company. The charges were laid in the mid| die of the last provincial elec2 tion campaign, he said, one 1/1 day before the sitting environment minister, James Bradley, made a speech promising to crack down on environmental polluters (the New Democrats, under leader Bob Rae, won the election in September, 1990).

The Crown prosecutor in the Bata case, Jerry Herlihy, denies that the shoe manufacturer was singled out for special attention, citing more than 15 other prosecutions that have been laid against companies since the province’s Environmental Protection Act became law in 1986. But Herlihy is adamant about the importance of targeting corporate directors. “When a corporation is prosecuted, it can be an embarrassing thing, but it pays the fine and carries on,” he said. “The real changes to corporate behavior are only going to come when the people who have the power to make the decisions decide to treat the environment with as much respect as they treat profits.” Meanwhile, until the corporate community takes its new responsibilities fully into account, the modest benefits of a corporate directorship are occasionally going to be overwhelmed by serious liabilities.

BRENDA DALGLISH