Why Canada's corporate boards are courting disaster

The biggest threat to Canadian companies exists in the boardroom. Board-level governance failures can destroy billions in shareholder value, ruin reputations and trigger crises that were entirely preventable.

Corporate disasters rarely happen because boards lack information, but rather because they fail to act on the information they have.

After years of advising employers, executives and boards, I have found that serious governance breakdowns seldom stem from missing information. Boards usually have the data. What they're often missing is the willingness to challenge assumptions, test management's conclusions and act quickly when risks emerge.

Canada's corporate governance framework is becoming increasingly sophisticated. Boards today have specialized committees and directors receive ongoing education as disclosure requirements continue to expand.

And yet, despite these purported safeguards, many boards have become less effective at providing meaningful oversight.

The problem is not a lack of governance but the illusion of governance.

Consider a company that receives reports showing rising cybersecurity vulnerabilities. The board reviews them, accepts management's assurances that they're on top of the issue and records the discussion.

Months later, a major breach occurs. The information was available. What was missing was rigorous challenge and follow-through.

We have seen such lessons before. At Nortel, concerns about accounting practices and financial controls emerged long before the company's collapse. While many factors contributed to its downfall, subsequent scrutiny highlighted failures in board oversight. The issue was not a lack of information but a lack of action in dealing with visible risks.

The most dangerous words in a boardroom are often implied: "Everyone seems comfortable with this."

The best boards are not harmonious. They are constructively adversarial. A board's role is not to support management but to challenge it.

That is often difficult. Many directors are selected through networks that reward collegiality and consensus. Those qualities make meetings cordial but weaken oversight.

When management presents a polished strategy or reassuring risk assessment, too many directors focus on whether it is clear rather than whether it is correct. The result is a culture where disagreement becomes difficult and consensus becomes the default.

Just as consensus undermines oversight, so can a narrow understanding of independence. Governance guidelines place enormous emphasis on independence but define it too narrowly. A director can satisfy every technical test while remaining unwilling to challenge management.

True independence requires intellectual courage — the willingness to ask difficult questions, demand satisfactory answers and risk becoming unpopular.

Many directors serve on multiple boards. They may be technically independent but practically overcommitted.

Others bring priorities (often flavours of the day) that distract from the board's primary responsibility: protecting shareholder value through effective oversight.

The issue is not diversity, which is one recent focus in appointing directors. (And yes, boards benefit from diverse perspectives and experiences.)

The issue is competence.

Boards facing cyber threats, artificial intelligence challenges or geopolitical risks need directors with relevant expertise. No amount of demographic disclosure can compensate for a lack of knowledge in critical areas.

Weak oversight is especially visible in executive compensation.

Compensation committees regularly approve pay packages that reward short-term success while imposing limited consequences or accountability for long-term failure.

The rationale is always the same: the compensation is "market," consultants recommended it or peer companies are doing it.

These explanations amount to governance by imitation — or simply no governance at all.

Boards are supposed to exercise judgment, not outsource it.

Too often, compensation decisions reflect a desire to conform rather than a careful assessment of whether incentives support the necessary, long-term performance.

The result is a system where executives are rewarded for outcomes that prove unsustainable while shareholders bear the consequences.

Compensation is only one area where boards mistake process for performance.

Every board claims to take risk seriously. Many do not.

Risk oversight often becomes an exercise in reviewing dashboards, charts and consultant reports that create the appearance of diligence without the need to make difficult decisions. It is performative.

The most important warning signs aren't usually found in quarterly presentations. They appear in executive turnover, employees' reluctance to speak candidly, gaps between management reports and frontline realities, and a culture in which disagreement disappears.

Those are true governance risks, and they can be discerned long before financial statements confirm the damage.

Good boards consistently avoid such traps.

The strongest ones seek information beyond management presentations, insist on hearing dissenting views, recruit directors for their expertise and refresh their own ranks before stagnation sets in.

Most importantly, they understand that their role is not ceremonial.

Directors are not occasional advisors. Their legal responsibility demands skepticism, not mere attendance. They are legally fiduciaries entrusted with protecting the enterprise. A failure to exercise their duties creates the basis for lawsuits against them. Such lawsuits are rare in Canada, which fosters the illusion that matters are proceeding better than they are.

Canadian companies face unprecedented uncertainty. AI is reshaping industries, supply chains remain fragile, geopolitical instability is on the rise, global trading patterns are shifting and regulatory scrutiny continues to expand.

In such an environment, passive oversight is not merely inadequate. It is dangerous.

Boards should adopt concrete governance practices: conduct regular independent evaluations, require exposure to dissenting viewpoints and hold executive sessions without management present.

Director recruitment should focus on identified skill gaps, particularly, depending on the industry, in cybersecurity, technology, artificial intelligence, risk management and global operations.

Boards should also ensure direct access to the company's risk, compliance and internal audit leaders, monitor culture through employee feedback and turnover data, regularly review succession plans and align compensation more closely with long-term performance and risk-sensitive metrics.

The true measure of a board is not how effectively it manages a crisis. That usually signifies a board (and leadership team) that has already failed.

It is whether a crisis materializes at all.

The best boards prevent disasters. The worst congratulate themselves on governance while warning signs accumulate in plain sight.

And by the time everyone sees them, it is too late.

Howard Levitt is senior partner of Levitt LLP, employment and labour lawyers with offices in Ontario, Alberta and British Columbia. He practises employment law in eight provinces and is the author of six books, including the Law of Dismissal in Canada.