September 29, 2020
This publication has been updated as of June 24, 2021.
Recent incidents in Canada and the U.S. have impinged that the impact of systemic racism and sexism must be explored in both public and private entities. It’s a forgone conclusion that diversity in thought and in leadership makes good business sense; therefore, corporations are set to gain by increasing diversity and by providing all Canadians opportunities to a seat at the table. And the rapid adoption of ESG (Environment, Social, and Governance) principles is driving more corporations (and their stakeholders) to assess and address the diversity in their leadership and throughout their organization. Yet it’s clear that current representation on boards and senior management still doesn’t reflect the diversity of Canada’s available workforce.
Federal Government Action. The Canadian government has taken a number of steps intended to indicate its commitment to the goals of ending systemic racism and achieving greater diversity:
Legal Disclosure Requirements. Canadian law reflects this carrot versus stick approach to addressing diversity on Canadian 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 and leadership 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.
Private Sector Opportunities. 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. 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 long term impact 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 imposed 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:
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 2020, the diversity disclosure obligations had been in effect for six full proxy years. On March 10, 2021, the CSA issued its Report on Sixth Staff Review of Disclosure Regarding Women on Boards and in Executive Officer Positions detailing trends based on a review sample of 610 issuers. The Report indicates there has been some progress – but there’s still a long way to go, especially in the C-Suite, and in the Mining and Oil & Gas industries that represent 42% of issuers:
The Report also suggests, however, that those corporations that have implemented the mechanisms they are required to disclose have achieved a higher level of gender diversity than those that have not:
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:
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. 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 intent appears to also take a carrot versus stick approach, stating it will continue to “reach out” to “inform” and “remind” corporations of their disclosure obligations and “encourage” compliance. The threat of shareholder pressure, rather than the threat of punishment, might also motivate corporations to report on – and to increase – their diversity.
Disclosure. Corporations must provide this information at every annual meeting by including it in the notice or proxy circular:
Guidelines. Corporations Canada (the government agency that administers the Canada Business Corporations Act) acknowledged a gap in specifying how corporations should disclose information in the proxies. To mitigate this gap, Corporations Canada published Guidelines to encourage and help corporations to disclose their diversity information in a consistent manner. The intention is that corporations disclose information separately for directors and senior management roles, and have an opportunity to disclose additional information that might be relevant to give stakeholders an accurate picture of the corporation’s commitment to diversity in leadership.
Impact. The diversity disclosure obligations of applicable CBCA corporations only took effect on January 1, 2020, and COVID-19 disrupted business operations for many corporations only two months later. Still, on April 7, 2021, Corporations Canada issued its first annual report on the diversity of boards of directors and senior management of federal distributing corporations respecting disclosure information, similar to that of the CSA respecting gender diversity disclosure. The findings were consistent with conclusions from several studies: women, Indigenous peoples, people with disabilities and members of visible minorities are significantly under-represented on boards and in senior management positions of federal distributing corporations in Canada. However, the findings also demonstrate that the past six years of gender diversity disclosure requirements for non-venture reporting issuers has contributed to the improvement in representation of women in leadership positions. There’s thus reason to be optimistic that a similar result could play out for members of other underrepresented groups with the implementation of the broader diversity disclosure requirements the CBCA now mandates. In particular, the consistent reason offered for not adopting a measure in key areas was merit-based candidate selection. This could present an opportunity for Corporations Canada to engage with corporations to better understand this hurdle and provide support to overcome it. The next few years will reveal whether CBCA corporations use the diversity disclosure obligations along with government supports as an opportunity to reflect on and improve their corporate governance diversity and inclusion practices.
Please contact your McInnes Cooper lawyer or any member of our Corporate Governance & Compliance Law Team @ McInnes Cooper to discuss this topic or any other legal issue.
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