Jan. 15, 2020 - The official Annual Report under the Investment Canada Act (ICA) for the fiscal year 2018-19 was released at the end of 2019. This document sets out various statistics and other noteworthy developments during that time frame (i.e., April 1, 2018 to March 31, 2019) relating to the two review...
Corporate Governance Update: CSA and ISS Seek Input on Director Independence, Overboarding and Gender Diversity
On October 26, 2017, the Canadian Securities Administrators (CSA) published Consultation Paper 52-404 – Approach to Director and Audit Committee Member Independence (Consultation Paper), seeking comments on the appropriateness of Canada’s approach to board and audit committee independence requirements. In addition to general comments sought on Canada’s independence regime under securities laws, the CSA also invite comments on specific questions. Separately, the same day, Institutional Shareholder Services, Inc. (ISS) launched its annual benchmark voting policy consultation period. ISS is seeking comments on a variety of new policies or policy changes for the 2018 proxy season, including on overboarding and gender diversity applicable to issuers listed on the Toronto Stock Exchange (TSX).
CSA Consultation Paper on Independence Standards
Through the Consultation Paper, the CSA is seeking to facilitate a broad discussion on the appropriateness of its approach to determining the independence of directors and audit committee members under the existing “comply or explain” corporate governance regime under National Instrument 58-101 – Disclosure of Corporate Governance Practices (NI 58-101), and National Policy 58-201 – Corporate Governance Guidelines (NP 58-201), and the independence principles articulated in National Instrument 52-110 – Audit Committees (NI 52-110).
Currently, NI 52-110 includes a subjective definition of independence, coupled with bright-line tests that preclude directors or audit committee members from being considered independent on the basis of certain prescribed relationships. NP 58-201 and NI 58-101 supplement this regime with “best practices” corporate governance guidelines and a “comply or explain” disclosure model.
Some stakeholders have expressed concern over the inflexibility and restrictiveness of the independence standards embedded in the Canadian corporate governance regime, commenting that these standards potentially preclude individuals with the appropriate expertise and judgment from being considered independent by a board, and limit the pool of eligible individuals who might otherwise be considered independent. On the other hand, any changes to the independence standards should be balanced carefully against countervailing concerns over the uncertainty, unpredictability and potential costs associated with making changes to the existing approach or transitioning to a new approach.
The Consultation Paper provides a comparative overview of the approaches taken to determining director and audit committee member independence in Canada, Australia, Sweden, the United Kingdom and the United States. Other than the United States, the jurisdictions covered provide an alternative principled-based approach to determining independence, thereby potentially affording greater flexibility to boards in determining whether or not nominees are independent. In 2008, the CSA proposed replacing the approach to independence in NI 52-110 with a principles-based definition of independence and guidance; however, based on comments received, the CSA concluded that it was not appropriate to implement significant changes to the regime at that time.
In addition to inviting general comments, the CSA is seeking comments on specific questions, including the following:
- whether the CSA’s approach to director and audit committee independence in NI 52-110 is appropriate for all issuers, and the benefits and limitations of the existing approach;
- whether the CSA should make any changes to the approach for determining independence under NI 52-110, such as changes to the definition of independence, the bright-line disqualifying tests or the exemptions from the audit committee independence requirements; and
- the advantages and disadvantages of maintaining the existing approach to determining independence versus replacing it with an alternative approach.
Comments are requested by January 25, 2018. Read the full text of the Consultation Paper.
ISS’s 2018 Proposed Overboarding Policy Changes and New Diversity Policy
Also on October 26, 2017, ISS launched its annual benchmark voting policy consultation period, seeking comments on a variety of new policies or policy changes contemplated for the 2018 proxy season. Specifically, ISS is requesting feedback on 13 voting policy areas applicable in the Canadian, U.S., European and Asian markets. In Canada, for TSX-listed issuers, ISS is considering the following two proposals:
- Change in Overboarding Policy. Under ISS’s current policy, a director is considered “overboarded” if (i) a CEO director sits on more than one additional public company board or a non-CEO director sits on more than four public company boards and (ii) that individual has attended less than 75% of the board and committee meetings held in the past year, without a valid reason. ISS is proposing to remove the latter attendance criterion of its two-pronged test, such that a director will automatically be overboarded and trigger a negative vote recommendation by ISS if he or she exceeds the public company board threshold limits. ISS is proposing to implement this change with a one-year transition period, affecting up to 167 outside CEO directors and up to 148 non-CEO directors of TSX-listed issuers, or 5.7% of total director election votes (assuming the policy had applied during the one-year period from August 2016 through July 2017).
- New Gender Diversity Policy. ISS is also proposing to implement a new board gender diversity policy for the 2018 proxy season (without any transition period), to promote better disclosure by TSX-listed companies and higher levels of gender diversity in boardrooms. Under the proposed new policy, if (i) an issuer has not adopted a formal written gender diversity policy and (ii) no female directors serve on the board of that issuer, ISS will recommend withhold votes for the chair of the applicable nominating committee (or the board chair if there is no nominating committee), subject to certain limited exceptions. ISS indicates that a “robust gender diversity policy” should include measurable goals or targets indicating a firm commitment to increase board gender diversity within a reasonable period of time. This requirement would go further than the CSA’s current “comply or explain” disclosure model relating to gender diversity in NI 58-101. Legal boilerplate or contradictory language in policies or disclosures may result in withhold votes for directors. Under the proposed policy, ISS will also take into consideration a board’s disclosed approach to considering diversity in executive positions and stated goals or targets to advance women in executive positions, which may also affect ISS’s voting recommendations. According to ISS, the proposed policy would affect about 5% of S&P/TSX Composite Index issuers that do not have a policy or any women on their board, and about half of non-S&P/TSX Composite Index TSX-listed companies covered by ISS.
Comments are due by November 9, 2017. Read the ISS 2018 Benchmark Proposed Policies and Changes.
Jan. 13, 2020 - The Canadian Securities Administrators (CSA) has published a consultation paper seeking input on the potential implementation of an “access equals delivery” model – an electronic access alternative for satisfying prospectus and other documentary delivery obligations under Canadian securities...