LAW 534 Chapter 14 Textbook: Risk Management Systems for Individuals

14.1 Compliance Officers (Pg.1518)

- The merits of charging individuals who act within corporate organization raises significant debate
Professor Glassbeek: “Directors and their allies have furiously attacked the increased range of managerial
obligations. the center of their argument is that their lives have become so fraught with risk, so burdensome as their
duties are multiplied dramatically, that society is in danger of throwing out the baby with the bathwater.”

Factors that could be incorporated into legislation to assist in determining the scope of influence & control of
individuals who are directors or officers & senior managers.
- These factors would help to determine whether the individual should be held accountable, subject to due
diligence, for the actions of their subordinates
1. Is the individual responsible for performance appraisals resulting in salary increases or decreases?
2. Can the individual fire subordinates?
3. What is the frequency of normal meetings and supervision?
4. To what extent is the individual compensated for management duties?
5. How much delegation of Duty normally occurs within the organization?
6. Does the manager have an agreement with respect to indemnification or legal fees and/or fines arising from
potential personal liability?
7. Does the manager reside in the jurisdiction or outside of the country?

14:3. Systems for Individual Due Diligence Seperated from Corporate Due Diligence (Pg.1521)
- Directors will satisfy due diligence requirements if they create a system to prevent & correct offences
- The difficult issue concerns the way in which an individual's responsibility for corporate compliance interacts
with that of an organization
- It may be sufficient if the individual officer shows that within his or her sphere of influence and control, he or
she tried to act responsibly and reasonably
There are 2 Alternate Scenarios where an individual officer may be charged w/ an offence:
1. The corporation succeeds in showing that is exercised due diligence
2. The corporation is unable to show due diligence (more difficult)
- Hard to conceptualize how an individual (senior officer, etc) can prove due diligence where the
corporation was unable to do so

14:4 Documentation of Individual Due Diligence (Pg.1522)

- Where the interests of the corporation & individual officers intersect, internal memoranda may be critical to
the validity of due diligence defences
- In the Eron Case - the memos sent by Sherrin Walkins would have been some evidence that she had
individually attempted to act w/ due diligence, even in the face of a corporate mindset to ignore the problems
- Internal memos in Eron, may be a double-edged sword
- This situation presents one of the most difficult issues that can arise when the interests of individuals &
corporations intersect & in some cases collide.
- In CanadianOxy Chemicals. v. Attorney General, such memos may be used by the prosecution against
the corporation in demonstration of the problem & a failure to act immediately to rectify it
- However, the other side cuts against a corporation that has a policy of shredding memors or not making
them in the first place - here the prosecution can argue that there is a concerted policy to destroy damaging
evidence, or negligenct failure to keep records that are integral to any corporate system of due diligence
1 strategy to enhance the usefulness of internal memos is to encourage the use of value neutral language that
stresses the facts & not conclusions
Reasons for this perspective:
1. The author of the memo may not be qualified to use legal terms such as “due diligence”
2. Emotion may enter into the choice of descriptive words
In CanadianOxy Chemicals. v. Attorney General, → the anonymous memo sent from Ms.Walktins, this strategy failed
on 3 counts: (Pg.1523)
1. On an individual basis, the memo has less evidentiary force in proving due diligence if not formally signed

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 2. Upper management may not take an anonymous memo seriously (perhas dismissing it as simply sour
grapes by a disgruntled employee)
3. The subjective language employed in the letter detracts from its overall impact
→ Since Ms. Walkins wouldn't sign the memo highlights a serious problem, that may impede individual due diligence
- Federal gov’ in CAD has enacted whistleblower protection
The law protects employees who report unlawful conduct within their corporation from retaliation by creating a new
offense to deter employment related intimidation

The Offence is as follows: (Pg.1525)

425.1(1) → No employer or person acting on behalf of an employer or in a position of authority in respect of an
employee of the employer shall take a disciplinary measure against, demote, terminate or otherwise adversely affect
the employment of such an employee, or threaten to do so
a) With the intent to compel the employee to abstain from providing info to a person whose duties include the
enforcement of federal or provincial law, an offence that an employee believes has been/is being committed
contrary to Fed or Provincial Act… atc
b) With the intent to retaliate against the employee b/c they provided info (to a person whose duties include the
enforcement of fed or provincial law
2. Anyone who contravenes subsection (1) is guilty of
a) An indictable offence & liable for imprisonment for a term not exceeding 5yrs; or
b) An offence punishable on summary conviction

14:5 Competing Directing Minds (Pg.1526)

- From the viewpoint of an individual officer, it may appear as if there are several castles within an
organization each w/ its own set of walls
- Risk is that an individual may be lulled into a false sense of security by relying on the work of another
department, w/out conducting any separate due diligence
- Department lack of due diligence = significantly weakens the individuals due diligence argument
In the Enron meltdown, some employees claimed that some damage couldve been avoided had Anderson
performed its accounting job properly
- Anderson response: none of this wouldve happened had Enron not concealed documents from them
- Individual executives shouldnt limit their roles in a way that doesnt give all transactions the necessary lebel
of review that the board requires
- Potential strategy = holding regular weekly meetings & encourage a healthy dialouge

14:6 Conflicts of Interest (Pg.1527)

- Outside audits help protect against internal conflicts of interest
- Independent audits are useful & provide excellent evidence of of attempts to build appropriate due
diligence systems

14:7 Compensation (Pg.1527-29)

R. v. Bata Industries Ltd:
Courts can alter corporate culture by recognizing the issue of compensation as a factor in the matrix of due diligence
- Level & timing of compensation is some indication of the level of responsibility of the individual outside of
formal title
- This approach was first advanced in this case
- The addition to the due diligence assessment is to suggest that courts ought to encourage the development
of compensation systems that are linked to positive regulatory compliance

14:8 Indemnities (Pg.1529)

- Generally, a corporation will indemnify the director for legal & other expenses the director is required to pay
in connection w/ the lawsuit,
To qualify the director must: (in a corporation)
1. Have acted honestly and in good faith, in the best interests of the corporation
2. The director must have reasonable grounds to believe that his/her conduct was lawful

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Carol Hansell suggests: Indemnity should include investigations, inquiries & hearings, whether or not charges have
been laid & costs should include expert fees
A key issue for negotiation is the timing of the indemnification

Bennett. v. Bennett Environmental Inc.: The case is centered around the interpretation of s.124 of the Canadian
Business Corporations Act, which states:
A corporation may not indemnify an individual under subsection (1) unless the individual:
a) Acted honestly & in good faith w/ a view to the best interests of the corporation, or, as the case may
be, to the best interests of the other entity for which the individual acted as director or officer or in a
similar capacity at the corporations request; and
b) In the case of a criminal or administrative action or proceeding that is enforced by a monetary
penalty, the individual had reasonable grounds for believing that the individuals conduct was lawful

A CORPORATION CAN NOT INDEMNIFY AN INDIVIDUAL UNLESS THEY:

- Acted honestly and in good faith
- Reasonable grounds for believe your conduct was lawful
(the corporation MAY indemnify you, they don't have too)

14:9 The Dynamic Between Individuals & Corporations When Charges Occur (Pg.1531)
Dynamics occur when 2 or more persons are accused as parties to the same crime
- Courts have created a presumption that generally such persons ought to be represented by separate and
independent counsel
- An issue can be that one of the accused take a deal to testify agaisnt another accused
- The co-accused situation creates a dynamic referred to as “prisoners dilemma”
In the regulatory sector, dynamics are complicated by the fact that the co-defendants often will continue to
work with each other
- Potential danger of abuse of power by the corporation
- Realistically, the individual cannot consider testify against the corporation unless theyre planning to resign
- The corporation cannot really “blame” the individual unless they can show the individual was working outside
of the schop of his/hers duties
- If they were working within the scope of their duties, the corporation would destroy its own due diligence
defence by blaming the individual

Regulatory Prosecturors Weapon: The ability to compel an employee to testify against the corporation is NOT
violating the Charter of rights, provided that the testimony is not used against the individual in his/her own trial
- In CanadianOxy Chemicals. v. Attorney General, permits the state to obtain warrants for info in
anticipation of due diligence & permits the state to obtain info against an individual w/out resorting to plea
bargain

Reasons why a prosecutor may decline to charge a corporation: (pg.1533)

a) Corporation may be judgement-proof & have no assets to pay a fine
b) The individual directly involved may be an easier target
If there are no charges brought against the corporation, it may be easier for the corporation to sacrifice the individual
director by distancing itself from his/her actions or even blaming him/her, although if there are damages, the
corporation might be held civilly liable
- A Further dynamic between individuals and the corporation relates to the funding of the defense of
regulatory offence.
- Studies have found that regulatory trials are an increasing presence on the provincial docket &
that they often compromise longer trials
- If the individual continues to be employed as a director, he/she may be indemnified for legal fees
consistent with the good faith clause in corporate legislation
- Difficult point = the point relating to the issue of the concept of “good faith” - which is essentially a
function of intent will cover attempts to exercise due diligence
IF the individual no longer works for the corporation & was neither a director or officer, the payment of legal
fees falls into a discretionary realm that may be the subject of negotiation between counsel for that
individual & the corporation.
- If individual doesn’t receive indemnity for legal fees and is no longer working for the corp., it may be very
difficult for the individual to withstand the battle of a long regul;atory trial

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 - Individuals cannot match the corporate or state resources for counsel
- The individual may well have to take significant time off work to attend trial (may last many months,
which is not realistic for taking off work)
- PRACTICAL RESULT: Individuals charged w/ regulatory offences end up pleading guilty b/c they
lack the resources to mount an effective due diligence defence
- The cost of the legal fees & trial could be = or greater than the the cost of defence → easier &
cheaper to plead guilty (Pg.1535)
IF the corporation no longer exists, the only targets left may be the individual corporate officers
- In CanadianOxy, the state seizure of corporate documents warrant may actually be helpful to the individual
defendant, may assist the defendant in some circumstances by creating a burden on the crown to preserve
the due diligence evidence & ensure its disclosure to all defendant.

14:10 Individual Morality Within the Group (Pg.1537)

The Enron Scandal illustrated the potential for group peer pressure to influence individual behaviour. Pressure from
outside & inside contributed to the culture.
“Acquired Situational Narcissism” → symptoms of classical narcissism (lack of empathy, grandiosity, need for approval &
anti-social tendencies) → the culture of narcissism in work

In Enron (pg.1538) → WALKTINS claims being an ordinary employee was “the kiss of death”, was created by
competition between the 2 cities and to compete, Enron had to offer more generous compensation packages & lavish
stock options
- People were expected to work on the edge like there were “no rules to contain your thinking in the offices &
outside the office”
With external pressures & internal culture, an individual's moral compass may be affected in several ways
1. The group psychology & authority structure may unconsciously alter an individuals perception of what is
acceptable
2. Relates to the difference between the identification of a moral problem and the action taken to deal with it