Recent incidents in Canada and U.S. have impinged that the impact of systemic racism must be explored in both public and private entities. The first appointment of a Minister of Diversity and Inclusion and Youth in 2019 and the September 23, 2020 Speech from the Throne make it very clear:  the Government of Canada is focused on tackling systemic racism in public entities and systems. Many private entities have also taken this opportunity to reflect on their diversity and inclusion practices with renewed pledges and passion to break down barriers. This is a time when corporate governance diversity disclosure requirements offer a starting point to increase representation on boards and in senior management.

Current diversity requirements in Canadian law is limited to the implementation of disclosure obligations. Disclosure obligations don’t dictate a diversity quota to the corporations subject to them, but they do make the diversity of a corporation’s governance team transparent to stakeholders. These stakeholders comprise of actual and potential investors, an increasing number of which, along with proxy advisory firms Institutional Shareholder Services (ISS) and Glass Lewis, include diversity practices and reporting compliance as key criteria in their proxy voting advice and guidelines.

Data compiled on gender diversity reporting obligations suggests those corporations that implemented key mechanisms achieved more success than those that have not. While it’s too early to know the results of the broader diversity disclosure obligations that took effect on January 1, 2020, there’s hope similar gains will be made. Here’s a snapshot of the two key Canadian corporate governance diversity reporting obligations and how they have impacted corporate governance in Canada to date.

Non-Venture Reporting Issuers

Amendments to National Instrument 58-101 Disclosure of Corporate Governance Practices impose six new disclosure obligations specifically related to women on boards and in senior management of non-venture reporting issuers. The Canadian Securities Administrators (CSA) expressly noted the amendments are intended to “increase transparency for investors and other stakeholders regarding the representation of women on boards and in senior management of non-venture issuers … to assist investors when making investment and voting decisions.”

Application. Starting on December 31, 2014, the securities regulators of every Canadian province and territory except, to date, B.C., and P.E.I., have adopted the amendments to NI 58-101, which apply to all non-venture issuers reporting in each participating Canadian province and territory.

“Diversity”. The “diversity” that non-venture reporting issuers must disclose is limited to gender diversity, and in particular, to women.

Disclosure Details. Issuers subject to the gender diversity reporting obligations must disclose this information in the proxy circular or the annual information form filed following its financial year:

• Policy. Whether the issuer has a written policy relating to the identification and nomination of women directors. If it doesn’t have a policy, it must explain why it hasn’t created one. If it does have a policy, it must summarize:
  • The policy’s objectives and key provisions.
  • The measures the issuer has taken to ensure it has effectively implemented the policy.
  • The issuer’s annual and cumulative progress in achieving the policy’s objectives.
  • Whether, and if so how, the board or nominating committee measures the policy’s effectiveness.

• Board Candidates.Whether the issuer’s board or nominating committee considers the level of representation of women on the board when it’s identifying and nominating candidates for the board. If it doesn’t consider this, it must explain why not.

• Senior Management Candidates. Whether the issuer’s board or nominating committee considers the level of representation of women in senior management when it’s identifying and nominating candidates for executive officer appointments. If it doesn’t consider this, it must explain why not.

• Targets. Whether the issuer has adopted a target (either a number or percentage) for women directors and executive officers. If it has, it must disclose the target and the annual and cumulative progress it has made in achieving them; if it doesn’t, it must explain why it hasn’t adopted one.

• Representation. The number and percentage of the issuer’s women directors and executive officers.

• Board Vacancies.Whether or not the issuer has adopted term limits for the directors on its board or other mechanisms of board renewal and if it hasn’t, why not (the point is to make space available on boards for women to occupy).

Comply or Explain. These obligations follow a “comply or explain why” model. The securities regulators monitor circulars for compliance with all disclosure obligations, assessing both the robustness of the disclosure and the explanations for non-compliance.

Impact. As at December 2019, the diversity disclosure obligations had been in effect for five full proxy years. On October 2, 2019, the CSA issued its Report on Fifth Staff Review of Disclosure Regarding Women on Boards and in Executive Officer Positions detailing trends based on a review sample of 641 issuers. The Report indicates there has been some progress – but there’s still a long way to go. For example:

• Board Seats. Women held a mere 17% of board seats and only 5% had a woman board chair. When the disclosure requirements came into effect, 49% of issuers had at least one woman on their board. This has steadily increased to bring this number to 73%. However, only 15% had three or more women on their board.

• Executive Officers. While 64% of issuers had at least one woman in an executive officer position, only 4% had a woman CEO and only 15% had a woman CFO.

The Report also suggests, however, that when corporations implement mechanisms they are required to disclose, those corporations have achieved a higher level of gender diversity than those that have not:

• Targets. Only 22% of issuers had adopted targets for representation of women on their board. However, women held an average of 24% of the board seats of issuers that adopted board targets for women; women held only an average of 15% of the board seats of issuers that did not.

• Policy. 50% of issuers had adopted a policy respecting the representation of women on their board. Women held an average of 21% of board seats of issuers that adopted a policy respecting the representation of women on their boards; women held an average of only 13% of board seats of issuers that did not.

• Board Vacancies. 57% of issuers had adopted some form of board renewal mechanism, either term limits, another mechanism, or a combination – and women filled 33% of board vacancies in year five (2019) of the review.

Public Corporations Under the Canada Business Corporations Act (CBCA)

Effective January 1, 2020, the mandatory director and senior management diversity reporting in Bill C-25, which the federal government introduced in 2016, finally kicked in. The CBCA amendments attempt to harmonize the corporate governance framework of federally-regulated corporations with that of their provincially-regulated counterparts and existing securities laws.

Application. The “prescribed corporations” to which the diversity disclosure apply are all distributing corporations; notably, unlike similar existing requirements under securities laws, venture issuers aren’t exempt from the CBCA diversity reporting obligation.

“Diversity”. These diversity disclosure requirements are far more expansive than those required of non-venture reporting issuers, extending beyond gender to “designated groups”. “Designated groups” is defined to include those “designated groups” under the Employment Equity Act, which include:

• Women
• Indigenous peoples.
• Persons with disabilities.
• Members of visible minorities.

Comply or Explain. Similar to the gender diversity reporting obligations applicable to non-venture reporting issuers, the CBCA model adopts a “comply or explain” model, although the compliance monitoring process isn’t yet clear.

Disclosure. Corporations must provide the information prescribed by section 172.1 – Disclosure Relating to Diversity of the CBCA at every annual meeting by including it in the notice or proxy circular:

• Policy. Whether the corporation has adopted a written policy relating to the identification and nomination of directors from designated groups, and if not, why. If a corporation has adopted a policy, the corporation must summarize:
  • The policy’s objectives and key provisions.
  • The measures the issuer has taken to ensure it has effectively implemented the policy.
  • The issuer’s annual and cumulative progress in achieving the policy’s objectives.
  • Whether, and if so how, the board or nominating committee measures the policy’s effectiveness.

• Director Candidates. Whether, and if so how, the corporation’s board considers the level of designated group representation on the board in the identification and nomination of directors.

• Senior Management Candidates. Whether, and if so how, the corporation considers the level of designated group representation in senior management when making senior management appointments. The CBCA defines senior management members by reference to the definition of “executive officers” in National Instrument 51-102 – Continuous Disclosure Obligations, which includes the CEO, CFO, President, Chair, or any other individual who performs policy-making functions for the corporation.

• Targets. Whether the corporation has adopted a target or percentage of persons of designated groups to occupy board and senior management positions and if so, the target and the corporation’s annual and cumulative progress in achieving that target. If a target has not been adopted, reasons as to why it was not adopted.

• Representation. The number and proportion of persons of designated groups in director and senior management positions of the corporation.

• Board Vacancies. Whether or not the corporation has adopted term limits for the directors on its board or other mechanisms of board renewal and if it hasn’t, why not.

Impact. The diversity disclosure obligations on applicable CBCA corporations only took effect on January 1, 2020, and COVID-19 disrupted business operations for many corporations only two months later in March 2020. There is yet little to no data compiled on whether, or to what extent, the new diversity reporting obligations have impacted the corporate governance diversity composition of public CBCA corporations. Some corporations have filed proxies that include required diversity information disclosures, but an annual report respecting disclosure information, similar to that of the CSA in relation to gender diversity, will provide important insight into the impact of these new disclosure obligations. While under the CBCA, an omission of diversity disclosure exposes the corporation and, potentially, officers and directors personally, to a fine up to $5,000.00 or to imprisonment for up to six months (or both), Corporations Canada’s (the government agency that administers the CBCA) intent appears to rely on the threat of shareholder pressure rather than the threat of punishment to motivate corporations to report on – and to increase – their diversity. The next few years will reveal whether public CBCA corporations use the diversity disclosure obligations as an opportunity to reflect on and improve their corporate governance diversity and inclusion practices.

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Please contact your McInnes Cooper lawyer or any member of  The Corporate Governance & Compliance Law Team @ McInnes Cooper to discuss this topic or any other legal issue.

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