In a low commodity price environment, it may become tempting for management and the board to reduce their focus on legal compliance in an effort to conserve resources. In some cases, growth energy companies have not established an internal compliance program under the supervision of the board.
Our view is that this is not a viable strategy for directors. Directors face significant potential liability under Canadian law for their failure - and perhaps more significantly for the failure of the companies that they supervise - to comply with legal obligations.
Before joining any board, or continuing their service on an existing board, directors should ensure that appropriate insurance, indemnities and legal compliance programs are in place. Given that the personal assets of directors are exposed to potential plaintiffs as a result of board service, it is essential that directors make a legal compliance programs a necessary requirement of board work.
Beyond personal risk, it is our experience that an effective and well-designed legal compliance program is a leading indicator of the long-term ability of the business to generate value and avoid unnecessary expenditures on legal activity. Good compliance practises are good for business.
What should directors look for in a legal compliance program before they commit to serve on a board?
- Focus on Indirect Liability
In practical terms, the most important liability directors' face is the Corporation's failure to comply with its public law obligations. A conscientious director can avoid breach of fiduciary duty and other personal misconduct, but it is much more difficult for the director to regulate the behavior of the corporation. A robust compliance program should first concern itself with the steps the corporation will take to avoid legal noncompliance by the officers and employees. - Make Sure it Matters
Directors can begin the process of creating a culture of compliance by engaging in design of the compliance program. Management should propose the program, but the directors should set aside time in a board meeting to assess its scope, objectives and review mechanisms. The foundation of many defenses available to directors is the degree to which they directed the corporation to establish mechanisms to ensure compliance. Perhaps more importantly, the directors have a unique opportunity to establish a culture of compliance from the top by making the program a priority. - Avoid Bureaucracy
A good compliance program can be understood by all of the members of the organization and is not overly formalistic. The law can be complicated and its requirements obscure unless it is effectively distilled to its core principles in a way that allows all employees to participate in the compliance effort. It is more important that a program is understood than it is lengthy, or cover every conceivable aspect of legal risk. - Support a Culture of Improvement, Not
Perfection
Some compliance programs suffer from the fact that they discourage the discussion of near misses or lessons learned from situations in which compliance was not achieved. Reality dictates that is not always possible to achieve perfect compliance. Although full compliance is always the objective, managers and employees should be encouraged to openly discuss, reflect on and use lessons learned from their efforts to improve the program. The board can strongly encourage this effort by consistently reviewing the performance of the compliance program, the efforts being made to improve it and benchmarking the program against the efforts of others.
For additional information regarding some of the key legal risks faced by oil & gas directors and some of the measures available to mitigate these risks, please see our presentation " Legal Compliance Risks and Strategies for Oil & Gas Directors".
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
