Board diversity is expected to loom large in the minds of Canadian shareholders, board directors and corporate governance teams in the year ahead, with proxy access and new listing disclosure requirements also high on the agenda.
A Canadian Securities Administrators (CSA) review – the results of which were issued in September 2016 – finds that progress is being made very slowly in terms of gender diversity on boards. Overall, the percentage of board seats occupied by women had increased to just 12 percent in 2016, up from 11 percent the year before.
Blake Cassels & Graydon partner Ross McKee told delegates at the Governance Professionals of Canada (GPC) conference in August that he believed regulators would be happy to see steady progress in terms of diversity, but that they may change their mind if the level of female board participation levels off at around 15 percent (see Canadian investors add to pressure on board diversity, CorporateSecretary.com, August 31). There has not been a concerted push for quotas so far, he noted.
Fellow panelist at the GPC event Pierre Tellis, senior counsel in TMX Group’s general counsel’s office and chief compliance officer for TSX Trust Company, pointed out that there has been significant progress in boosting board diversity in European countries where quotas have been enforced. He suggested there might be a change in views on doing the same in Canada if female participation rates stall at around 15 percent.
Board diversity will continue to be a focus for many companies in 2018, Torys partner Karrin Powys-Lybbe tells Corporate Secretary. ‘While there has been progress by issuers in reporting on their approach to gender diversity and an increase in the number of women on boards and in the C-suite since 2014, the rate of overall progress has been slow,’ she says.
Powys-Lybbe predicts that there will be an increase in gender diversity-related activity as the 2018 annual meeting season nears, with institutional shareholders increasingly putting pressure on issuers. She cautions that increases in the number of women on boards won’t happen overnight, however. ‘Networks need to be expanded, candidates for board and C-suite positions need to be identified and/or developed and these candidates need to make their way to the table,’ she points out.
There are other reasons to believe change may by coming down the pike. In October 2017, for example, the CSA published a review of the corporate governance disclosure of 660 companies; according to a regulatory notice on the review, it found a large ‘increase in the percentage of issuers that have adopted a policy relating to the representation of women on their board. Of the issuers sampled, 35 percent have adopted a policy, representing a 20 percent increase over three years.’
There are also several tools to help those companies that are willing to make changes. ‘A number of market leaders in diversity – such as the Canadian Coalition for Good Governance (CCGG) and Canadian banks – have policies that provide a road map for how companies can enhance gender diversity,’ Powys-Lybbe observes (see Tips on boosting diversity, below). ‘Over the past two years, we have seen a meaningful increase in the number of companies with policies regarding diversity. And I believe we will also soon see an overall increase in diversity – including people of color.
‘The approach to diversity around the world provides some additional insights. In the UK, for example, the focus is moving beyond gender diversity to recommending that there be at least one director of color on FTSE 100 boards by 2021. In addition, the UK has for some time had rules that encourage boards to have term limits, which are seen by many as an aid to board diversity.’
BILL C-25
Bill C-25 would amend the Canada Business Corporations Act (CBCA) by requiring that director re-elections take place annually, rather than every three years, in an effort to build more diverse boardrooms. ‘In general, the proposed changes to the CBCA are designed to modernize it, bringing it more in line with Canadian securities rules and the rules of Toronto Stock Exchange (TSX),’ Powys-Lybbe reports.
The CBCA permits a director to have a term of up to three years and does not require that each director be up for election each year, she explains. As a result, only some directors are up for election each year – which makes it more difficult for shareholders to gain board-level influence and contributes to entrenching existing management and directors.
‘Bill C-25 would also mandate majority voting, in the sense that a director could be elected only if he or she received more votes for than votes against,’ Powys-Lybbe continues. At present, many companies require a director who has not received a majority of for votes to resign, though the board can choose to ignore the resignation. ‘CBCA reforms would not leave any discretion for a board to permit someone to be elected if he or she has not received a majority of votes for,’ Powys-Lybbe adds.
‘Section 172 of Bill C-25 would require companies to disclose information about diversity on the board and on the senior management team,’ Peter Kimball, executive director and head of advisory and client services for North America at ISS Corporate Solutions, tells Corporate Secretary. ‘If C-25 is enacted, the biggest impact on corporate secretaries will likely be the diversity disclosure requirement, which would require the crafting of compelling, company-specific diversity disclosures. In essence, Bill C-25 is the federal government’s way of playing catch-up on corporate governance, as TSX and several provinces already require much of what the bill would do.’
Although the corporate community’s support for the legislation seems to vary widely, shareholders have been broadly supportive and C-25 is endorsed by the CCGG. At time of writing, Bill C-25 had passed a third reading in the House of Commons and was before the Senate.
PROXY ACCESS
‘The ability of shareholders to include director nominees on the company’s form of proxy has long been a feature of Canadian corporate law,’ Osler Hoskin & Harcourt partners Andrew MacDougall and John Valley write in a recent article. Despite this, proxy access has rarely been used in Canada.
At the 2017 annual meetings of TD Bank and Royal Bank of Canada (RBC), shareholder proposals were introduced asking the lenders to adopt proxy access by-laws. These would permit qualifying shareholders to submit director nominations to be included in the banks’ respective proxy circulars and forms of proxy, Valley tells Corporate Secretary. At the TD Bank meeting, the proposal was approved by 52.2 percent of the votes cast; at the RBC annual meeting, it was defeated, with 46.8 percent support. RBC says it’s committed to engaging with stakeholders on proxy access.
Valley predicts that in 2018, ‘other financial institutions may consider adopting proxy access policies and non-financial institution issuers will likely do so. Given the existing statutory shareholder proposal mechanics, however, there is less reason for change and they are more likely to adopt a wait-and-see approach.’
TSX DISCLOSURE
To add to governance teams’ workloads, as of April 1, 2018, section 473 of the TSX Company Manual will require most listed issuers to maintain a publicly accessible website and post current, effective versions of:
- Articles of incorporation, amalgamation, continuation or any other establishing documents of the issuer, together with the company’s bylaws
- The company’s majority voting policy
- The company’s advance notice policy
- Position descriptions for the board chair and lead director
- The board’s mandate
- Board committee charters.
Canadian reporting issuers with securities listed on foreign exchanges, such as the NYSE and the London Stock Exchange’s Alternative Investment Market, are already subject to website disclosure requirements for many of the types of documents covered by the new TSX requirements, Robin Upshall, partner at Davies Ward Phillips & Vineberg, tells Corporate Secretary. ‘For Canadian companies complying with website disclosure requirements for the first time, modifying their websites to disclose the required documentation will take time,’ she explains. ‘Following the initial website modification and posting of required documentation, there will be an ongoing compliance burden associated with ensuring the website at all times contains current versions of the relevant documentation.’
TIPS ON BOOSTING DIVERSITY
Torys partner Karrin Powys-Lybbe says ways in which companies can increase the number of women on their boards include:
- Using a recruiter to find new board members rather than relying on the network of the existing management team or board
- Reviewing the company’s criteria for selecting directors to ensure they are all truly required and do not create irrelevant barriers to women being considered
- Ensuring there is more than one female candidate in the pool of potential candidates
- Introducing a term limit on board directors so there is more opportunity to introduce new directors, including women
- Adopting a target
This article originally appeared in the Winter issue of Corporate Secretary.
