We updated this publication on December 22, 2022.

It’s a forgone conclusion that diversity in thought and in leadership makes good business sense; therefore, both private and public 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:

• The first appointment of a Minister of Diversity and Inclusion and Youth in 2019, the 2020 Speech from the Throne and the 2021 Speech from the Throne highlight the Government of Canada’s focus on tackling systemic racism, sexism, and discrimination in public entities and systems.
• The demographic of those in corporate leadership positions far from reflects the Canadian population available to work, according to Employment Equity in the Public Service of Canada for Fiscal Year 2018 to 2019. In December 2020, the Government of Canada along with business and diversity organizations launched the 50 – 30 Challengeasking organizations aspire to gender parity (50%) and significant representation (30%) of other under-represented groups on Canadian boards and in senior management. Participants receive a digital toolkit with industry specific resources and advice, among other benefits, with the goal of supporting increased representation and inclusion of underrepresented groups on their boards and in senior management. These tools and resources were developed with $33M funding by the Canadian government. As of December 5, 2022, 1,775 organizations are participating.
• Next steps towards long-term, foundational change to supplement the 2020 Speech from the Throne include the 2021 Federal Budget initiatives, in Part 3 – A Resilient and Inclusive Recoveryto amend the Public Service Employment Act to affirm the importance of a diverse and inclusive workforce and avoid biases and barriers in hiring, and a $504M pledge over the next five years towards Fighting Systemic Racism and Empowering Communities.

Legal Disclosure Requirements. Canadian law reflects this carrot versus stick approach to addressing diversity on Canadian boards and in senior management. Some jurisdictions are implementing a “quota” approach to boost board and management diversity. For example, on November 22, 2022, the  European Union adopted a “Women on Boards” Directive that establishes a goal of at least 40% of non-executive director posts or 33% of all director posts be occupied by the under-represented sex by June 30, 2026. However, 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. On December 31, 2014, the securities regulators of every Canadian province and territory except, to date, B.C. and P.E.I., 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 hasn’t adopted one, it must explain why it did not.

• 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 being 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 2022, the diversity disclosure obligations will have been in effect for eight full proxy years. On October 27, 2022, the CSA issued its Review of Disclosure Regarding Women on Boards and in Executive Officer Positions Year 8 Report detailing trends based on a review sample of 625 issuers. The Report indicates that while progress, particularly on boards, continues, it’s still slow going, especially in the C-Suite generally, and in the C-Suites of the Mining, Oil & Gas and Technology sectors:

• Board Seats.Women held a mere 24% of board seats, up from 11% in year one and only 7% 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 87%. While only 30% had three or more women on their board, this is a significant increase from a negligible 8% in year one.
• Executive Officers.While 70% of issuers had at least one woman in an executive officer position, only 5% had a woman CEO (no change from the preceding two years) and only 19% had a woman CFO (a minimal increase from the 14% in year four).

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:

• Targets. The number of issuers that have adopted targets for representation of women on their board has steadily risen from 7% in year one to 39%. Women held an average of 30% of the board seats of issuers that adopted board targets for women; women held only an average of 20% of the board seats of issuers that did not. Since only 39% of issuers have adopted targets, there’s still room to grow. In contrast, only 4% (down from 6% the prior year) of issuers have adopted targets for women in executive officer positions – and the lower number of women holding C-Suite positions reflects this. These numbers suggest that adoption of targets is an effective strategy to increase the number of women on boards – and likely in the C-Suite as well.
• Policy. 61% of issuers had adopted a written policy respecting the representation of women on their board. Women held an average of 28% of board seats of issuers that adopted a policy respecting the representation of women on their boards; women held an average of only 18% of board seats of issuers that did not. These numbers suggest that adoption of a written policy is also an effective strategy to increase the number of women on boards.
• Term Limits. 21% of issuers had adopted director term limits (36% of which adopted age limits only, 30% tenure limits only, and 34% both). Women held an average of 31% of board seats of issuers that have adopted term limits, versus 22% for issuers that have not, speaking to the effectiveness of a board renewal strategy to increase the number of women on boards. And 45% of board vacancies were filled by women in year eight – up 10% over year seven.

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. 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:

• 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. If so, the target and the corporation’s annual and cumulative progress in achieving that target; and if not, reasons why it wasn’t.
• Representation. The number and proportion of persons of designated groups in director and senior management positions of the corporation.
• Board Renewal.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.

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. In April 2022, Corporations Canada issued The Diversity of Boards of Directors and Senior Management of Federal Distributing Corporations – 2021 annual report, its second annual report respecting disclosure information, similar to that of the CSA respecting gender diversity disclosure. The findings suggest that more corporations have diversity of all kinds on boards and in senior management on their minds, and presumably in their discussions, during selection processes. However, they also suggest that those thoughts and conversations haven’t translated into actions – or results: women, Indigenous peoples, people with disabilities and members of visible minorities continue to be significantly under-represented on boards and in senior management positions of federal distributing corporations in Canada. The significant gains in the number of corporations considering diversity in the selections processes does give reason for optimism, especially in light of the improved representation of women in leadership positions over the past seven years of gender diversity disclosure requirements for non-venture reporting issuers. However, the consistent reason for not adopting measures in key areas as “preventing the selection of qualified candidates” suggests continued opportunity for Corporations Canada to engage in conversations with corporations to better understand this hurdle, and provide support to overcome it. The next few years will reveal whether CBCA corporations, powered by the diversity disclosure obligations and government supports, will further reflect on and take action to improve their corporate governance diversity and inclusion practices.

• Board Seats. 55% had at least one board seat held by women and 23% by visible minorities – an increase of 5% and 7% respectively. However, only 2% had at least one held by persons with disabilities, and one by Indigenous peoples, a negligible increase over the prior year. And women, visible minorities, persons with disabilities and Indigenous peoples cumulatively still held a total of only 27.4% of board seats, with 20% of those being held by women.
• Senior Management. Similarly, 68% had at least one woman on their senior management team and 28% at least one visible minority – an increase of 19% and 7.2% respectively. Again, however, only 2% had a person with a disability or an Indigenous person on their senior management team, a slight decrease over the prior year. And cumulatively, women, visible minorities, persons with disabilities and Indigenous peoples held 35.1% of positions in senior management teams of all reporting corporations, a negligible increase, with 25% of those still being held by women.
• Targets. The numbers show that more corporations than before are (or say they are) thinking about diversity representation on their boards and in senior management: 68% (up 22%) of corporations said they consider the level of representation of women, 58% (up 24%) consider the level of representation of each of Indigenous peoples and of members of visible minorities, and 57% persons with disabilities, on the board when identifying and nominating candidates for election or re-election. However, those considerations have yet to evolve into hard targets. Only 18% adopted targets for the representation of women on their boards – and a mere 4%% adopted targets for the representation of members of visible minorities, and 2% for each of Indigenous peoples and persons with disabilities. The same holds true for senior management representation: 61% (up 16%) of corporations said they consider the level of representation of women, and 55-56% (up 20%) consider the level of representation of each of Indigenous peoples, members of visible minorities and persons with disabilities among senior management when appointing members of senior management. But a mere 7% have adopted targets for the representation of women, and an average of less than 2% adopted targets for the representation of the other designated groups.
• Policy. 38% adopted written policies relating to the identification and nomination of women for directors, 33% of members of visible minorities, 32% of Indigenous peoples, and 31% of persons with disabilities for directors – all showing a single digit increase. And a substantial difference in the policy adoption rate between venture and non-venture CBCA corporations still exists, though the gap is narrowing: non-venture issuers (which are also subject to the gender disclosure obligations) were three times (versus six times the prior year) more likely to adopt written policies than venture issuers.
• Board Renewal. And despite the growing number of corporations that said they consider underrepresented groups on the board when identifying and nominating candidates for election or re-election, and that adopted related written policies on point, only 19% actually adopted some formal mechanism for board renewal (age limits, tenure limits, or both) – an increase of only 3% since the last report.

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Please contact your McInnes Cooper lawyer or any member of our Corporate Governance & Compliance Team @ McInnes Cooper to discuss your diversity disclosure obligations.