We begin our analysis with consideration of the goal of good corporate governance. Here the question becomes whether a board mandate that includes oversight of technical report preparation and disclosure will lead to better corporate governance. What though, is ‘corporate governance' and how does one measure ‘better' corporate governance?
The December 1994 report ‘Where Were the Directors? - Guidelines for Improved Corporate Governance in Canada' of the Toronto Stock Exchange committee on corporate governance in Canada (the TSX Report) stated the following as to how it interpreted ‘corporate governance':
2.1 ‘Corporate governance' means the process and structure used to direct and manage the business and affairs of the corporation with the objective of enhancing shareholder value, which includes ensuring the financial viability of the business. The process and structure define the division of power and establish mechanisms for achieving accountability among shareholders, the board of directors and management. The direction and management of the business should take into account the impact on other stakeholders such as employees, customers, suppliers and communities.
The TSX Report also said the following:
2.3 Corporate governance is a dynamic concept. In our recommendation, we try to recognize that the circumstances of each corporation will be different and that these circumstances will be constantly changing. An effective system of governance must not inhibit a corporation's ability to develop and to respond to its circumstances and to change. We are continually reminded in the course of our process that ‘one size does not fit all' or that ‘there is more than one road to Rome'. We were also reminded of the differences between the more junior or emerging company and the mature public company.
We are in agreement with these views. Further, in our experience when it comes to corporate governance, particularly in the mining sector, nothing can be more true than the notion that ‘one size does not fit all'. Each company must consider its governance regime in the context of its own facts including a thorough review of the composition and skill set of not only the board and its various committees, but also of the management team. We are also strongly of the view that a company must not ‘find religion' in governance for the sake of governance but rather adopt a regime that meets or exceeds applicable standards for the purpose of improving accountability and the management of the business and affairs of the company.
GUIDANCE FROM NATIONAL INSTRUMENT 43-101
The Companion Policy to National Instrument 43-101 (Standards of Disclosure for Mineral Projects) (NI 43-101) provides some, albeit limited, guidance as to responsibilities for mining-related disclosure. The Companion Policy sets out the views of the Canadian Securities Administrators (CSA) on the manner in which the CSA interprets and applies certain provisions of NI 43-101.
Section 2.1 of the Companion Policy states the following:
Disclosure is the responsibility of the issuer - primary responsibility for public disclosure remains with the issuer and its directors and officers. The qualified person is responsible for preparing or supervising the preparation of the technical report and providing scientific and technical advice in accordance with applicable professional standards. The proper use, by or on behalf of the issuer, of the technical report and other scientific and technical information provided by the qualified person is the responsibility of the issuer and its directors and officers. The onus is on the issuer and its directors and officers and, in the case of a document filed with a Securities Regulatory Authority, each signatory to the document, to ensure that disclosure in the document is consistent with the related technical report or advice. Issuers are strongly urged to have the qualified person review disclosure that summarizes or restates the technical report or the technical advice or opinion to ensure that the disclosure is accurate.
It is clear that directors and officers must at the very least ensure that the public disclosure of their company (and any oral statements made by company representatives) is consistent with the related technical report or advice.
While the Companion Policy puts the disclosure responsibility on directors and officers, it falls short of mandating that directors themselves read, approve and adopt a technical report in full to discharge that responsibility, and it is therefore, in our view, up to each issuer based on its own structure to determine how best to ensure that such responsibilities are met.
BOARD MANDATE OF TECHNICAL REPORT OVERSIGHT
Because of the inextricable link between the preparation of technical reports and elements such as capital expenditures and reserves and resources disclosure, the extent to which directors should review these reports is being considered more and more by both in-house and outside counsel.
The establishment of a board or committee mandate must be done in a manner that will lead to increased governance, without at the same time putting too high a burden on the members of the committee. We question whether it would be useful for a committee to review (as an audit committee, for example, would review financial statements) all independent technical reports filed by the company. Would this lead to better technical reports? Would errors in technical reports that may go unnoticed be uncovered?
The answer, in our view, to whether such reports should be reviewed at the director level is, in most cases, no. While perhaps leading to greater accountability, it may have net marginal benefit in terms of corporate governance as it will come at a significant cost. Will directors be inclined to sit on boards with a policy of this nature? Will directors themselves have the technical background and skills sufficient to review technical reports and the time to discharge such a review?
A more reasonable and pragmatic approach may, however, be to mandate oversight of the preparation of technical reports, prepared by management or third parties, with the right to review such reports, but without the absolute requirement to
In most cases, we believe that boards can discharge their duties properly and effectively without mandating a full review of each and every report. That is not to say that this issue should not be monitored going forward and depending on the winds of change of corporate governance and corporate practice, it may be that in the future this issue is reconsidered.
We do believe that technical reports stand separate and apart from financial statements. National Instrument 51-102 (Continuous Disclosure Obligations) makes it very clear that annual and quarterly financial statements as well as management's discussion and analysis must be approved by the board or a committee thereof. As discussed herein, there is no similar obligation to ‘approve' technical reports. In our view, this obligation of ‘approval' is at the top of the hierarchy of standards, followed, in descending order by ‘review' and then ‘oversight'. Similarly, there is currently no statutory obligation for a board or committee to ‘review' technical reports.
DETERMINING THE NEED FOR TECHNICAL REPORT OVERSIGHT
The extent to which directors should take an active role in the oversight of technical report preparation must be considered in light of the ability of the board of directors to make such a mandate a meaningful corporate governance exercise. In this respect, the following should be considered:
• any disclosure of elements of a technical report, such as reserves and resources, by necessary implication should require some level of oversight of the underlying technical reports, and mandating this responsibility to the board or a committee codifies such an action;
• codifying such an oversight mandate does not attract any additional liability to a board, if the policy is complied with;
• compliance with a board mandate that codifies oversight of resources and reserves estimation and underlying technical reports may provide additional and further support to being able to rely on the expert report defences available under applicable law in matters such as third-party liability and property preparation;
• additional oversight comes with an obligation to commit resources. Directors may not be prepared to commit the time necessary to oversee the preparation of all technical reports on an ongoing basis nor may they have the technical background and qualifications to adequately review technical reports; and
• a governance regime needs to be adaptable and not overly prescriptive to the point of making compliance difficult or impossible. This is important because whereas an expanded board mandate may not attract liability, liability may be attracted by non-compliance with a committee mandate.
The following questions should also be considered:
• How does the board or committee practically interact with other board committees and management?
• Does the board have confidence in management's existing technical capabilities to prepare technical reports or work with independent qualified persons (QP) in the preparation of independent technical reports?
Whether a company has significant overlap between management and directors as is often the case in the ‘junior' sector (potentially making a board review of technical reports redundant) or is a senior producer with a board less actively involved in the day-to-day business of the company, boards need to consider in their own context whether specific board or committee oversight of technical reports is warranted. If a board decides that director oversight of technical report preparation would lead to better corporate governance, we recommend that such a mandate, at minimum, incorporate the following:
• oversee the preparation of technical reports, whether prepared by management or third parties;
• grant the ability to review technical reports in their discretion;
• consult with counsel (either company counsel or independent counsel) in discharging its duties, specifically with respect to form and substance of technical reports and disclosure obligations;
• provide for and ensure use of a due diligence list of procedures and confirmations that may be used by the board (or committee thereof) in discharging its duties;
• review of professional qualifications of the QP;
• engage in ‘scope of work' discussions with the QP;
• engage in ongoing discussions with the QP regarding the technical report, both in camera and with management;
• engage in ongoing discussions with management regarding the technical report, both in camera and with the QP;
• review of consents and certificates of the QP;
• liaise with management on disclosure as well as the board's disclosure committee (if it exists);
• obtain confirmation from the QP on to compliance with NI 43-101, including correct use of categories of resources/reserves and site visits;
• test underlying assumptions used in the completion of the technical report; and
• engage in discussions with the QP responsible for any underlying reports used as the basis for the umbrella technical report.
We believe that director oversight of technical reports is a matter of evolution, not revolution. And, while one size truly will not fit all companies, this matter is important enough in the context of the resource industry and the Canadian capital markets that further discussion on this matter is very much warranted.