CHAPTER 09 Governance in a Nascent Industry: Lessons from Canada’s “Green Rush”
The CannTrust story underscores the importance of board independence and the extent to which a material relationship with the issuer can impair independent judgment. In this case, the chair’s material relationship with the company he founded may have impaired his judgment in not raising potential regulatory risk to the independent members of the board. It also appears the CannTrust board did not have effective controls in place to alert it to material risks affecting critical aspects of the business – namely, compliance with the very licences required to produce cannabis. Although active efforts were allegedly made by management to conceal illicit activities, the August 12 non-compliance notice regarding CannTrust’s second facility detailed several non-compliant practices, such as unauthorized construction, insufficient security controls and operating procedures that did not comply with statutory requirements. Especially in a heavily regulated industry, a board should take an active role in overseeing operational compliance and not rely exclusively on management to do so. Although CannTrust’s response in striking an independent special committee to investigate the wrongdoing and oversee its remediation was a positive step, this cautionary tale suggests that sound governance practices must be established from the outset, and that the risks of not doing so may be irreparable. And those risks are not limited to regulatory action alone – even in less regulated industries, reputational damage and loss of market share, significant stock price declines, short-selling activism, litigation and, ultimately, financial distress are common consequences. CannTrust has since been delisted from both the TSX and the NYSE and, at the time of writing this report, is awaiting the outcome of its CCAA proceedings.
EXPERT ADVISORY BOARDS MAY BE USEFUL IN SOME CIRCUMSTANCES A common practice in the cannabis industry that may be instructive to issuers in nascent industries or those with executive teams or boards that have limited public company experience is the formation of an advisory board. An advisory board is typically a small group of third-party experts struck to advise the CEO, management and/or the board on a specific aspect of the company’s business or a particular transaction or course of action. The recommendations of an advisory board are not binding on the issuer, and its members do not have a fiduciary obligation to the corporation. Nonetheless, advisory boards can serve to complement the skills and competencies that an issuer has in- house or to enhance the expertise, skills and objectivity of an issuer’s leadership in areas where it may lack bench strength. Of the 20 prominent cannabis LPs we examined, 50% have some form of advisory board, most often advising on the medical aspects of the cannabis plant and/or scientific research of the issuer. The CannTrust story underscores the importance of board independence and the extent to which a material relationship with the issuer can impair independent judgment. In this case, the chair’s material relationship with the company he founded may have impaired his judgment in not raising potential regulatory risk to the independent members of the board.
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Davies | dwpv.com
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