CSA proposes disclosure overhaul as single national regulator moves another step closer to reality
Following years of debate, the corporate regulatory environment in Canada is set for significant change. In addition to a string of other changes, Canadian regulator the CSA is proposing a new set of corporate governance rules – more specifically, the repeal and replacement of National Policy 58-201 Corporate Governance Guidelines, National Instrument 58-101 Disclosure of Corporate Governance Practices, and National Instrument 52-110 Audit Committees (and Companion Policy 52-110CP Audit Committees).
In response to the proposed changes and to allow issuers the opportunity to develop a better understanding of the issue and raise concerns, the Canadian Society of Corporate Secretaries (CSCS) held a series of meetings in Calgary, Edmonton, Montreal, Toronto and Vancouver.
The most common concern raised during the meetings relates to timing. Public companies have seen significant changes in the past two years, and many are dealing with new compensation discussion and analysis disclosure rules for the first time. Many companies are also dealing with International Financial Reporting Standards conversion. Taking on new governance rules, which are likely to require considerable disclosure challenges, would be too onerous this year, it is argued.
The CSCS notes in its official comment letter to the CSA that, if the motive for the changes is, as stated, ‘to provide Canadian issuers with a more flexible approach to corporate governance that is easier to tailor to individual requirements, removing the perception that all issuers are expected to adopt a one-size-fits-all model of governance,’ then the changes are largely redundant because the current comply-or-explain model already allows that flexibility.
Gulf of understanding
The proposal as it stands contains considerable ambiguity, and issuers are concerned the inconsistencies will make it more difficult to comply and may lead to increased financial costs as companies are forced to move from a system they understand well to one that is unclear and untested. The new regime may also be less valuable to investors as it may reduce shareholders’ ability to accurately compare disclosure from company to company.
In addition to the proposed changes to the various National Instruments, the move toward a unified Canadian securities regulator took a step forward in June when Doug Hyndman, chairman and CEO of the British Columbia Securities Commission, was appointed by the federal government to oversee the transition to a single national regulatory system. The appointment is something of a coup considering Hyndman was, until recently, a vocal opponent of the single regulator idea.
Supporters of the single regulator concept argue that a more unified approach, in which all listed companies are governed by the same standards and policed by a single body, rather than 13 independent provinces and territories, will help to identify system-wide risks more effectively and preserve financial stability.
Together with his team, Hyndman is tasked with formulating the legislation that will outline the new regulator’s mandate and define its jurisdiction. He will also lead the difficult task of negotiating with the provincial regulatory bodies, all of which have thus far opposed the change. Canadian finance minister Jim Flaherty, who made the appointment, has laid out a three-year timetable for the transition to a single regulator, and the first report from Hyndman is due before the end of this year.
The appointment has been widely praised by leading Canadian companies and the finance industry. Many of these companies are based in Toronto and believe the appointment of a western Canadian is a smart choice to counter the argument that the process is being closely controlled in the back rooms of Bay Street, Canada’s equivalent of Wall Street.
On his reversal of opinion toward the idea of a single regulator, Hyndman explains: ‘It is the regulator’s job to work with the system that the government establishes. With a number of governments, including British Columbia, electing to move forward with the single regulatory model, it is my responsibility to support that move and assist in making it a reality.’
Issuer concerns about the CSA proposals
The proposed new independence rule
A more principles-based independence rule that does away with bright-line tests that can force otherwise independent directors off boards is widely supported. The new rules also revise the condition preventing shareholder nominee directors from serving on audit and other committees.
But issuers are concerned about the proposed ‘reasonable perception’ standard. They feel it adds an unnecessary and confusingly subjective element to the independence determination that may prove hard for boards and nominating committees.
‘The independence determination must remain an objective exercise,’ states the Canadian Society of Corporate Secretaries (CSCS). ‘The board and its nominating committee must be in a position to determine whether or not a candidate or incumbent director is independent.’
Disclosure of board evaluation outcomes
The proposal to require disclosure of the board evaluation process may undermine the ability of directors to deal with sensitive corporate issues. By forcing public disclosure, argues the CSCS, board conversations will no longer be confidential so directors will be less willing to raise serious and sensitive issues for fear the information involved may become publicly available.
Some disclosure of more routine and less sensitive information may be possible, but arguably of no real value to investors and regulators.
Individual director expertise
Disclosing the expertise expected of individual directors, in terms of their role both as a director and as a standing committee member, may damage board collegiality and create different ‘classes’ of directors. Some issuers raise concerns that, while this rule is well intentioned, it could lead to problems with director liability if shareholders feel, based on the disclosed profiles, a particular director is not qualified. Many issuers already provide this type of disclosure but there are limits to what can be reported, and some skills or relationships will not easily be explained.
Structure of the rules
As highlighted by the CSCS: ‘Disclosure requirements should be grouped logically in the respective instruments. For instance, the disclosure required under Principle #6 seems to be redundant with item 13 of 51-102F2. The disclosure required under Principle #8 would make more sense included among the compensation-related disclosure in 51-102F6. The management discussion and analysis disclosure requirements buried in the CEO and CFO 52-109 certification forms would be better included in 51-102F1.’
