Canadian companies are facing growing pressure to increase the representation of women on their boards and in executive officer positions. There is evidence that suggests that companies with a greater balance of women on their boards generate better corporate returns and performance. Further, a more diverse board has been linked to better performance in other environmental, social and governance (ESG) factors beyond gender diversity itself. In this regard, gender diversity may not only be good for a company’s bottom-line but may also improve a company’s ability to respond to ESG risks and opportunities, through increased corporate social responsibility and by having a positive impact on the company’s response to climate change.
The number of women on boards of public companies has risen in Canada, at least in part by reason of a combination of legal disclosure requirements and institutional pressures. However, this rise has been slow, and Canada continues to lag behind many countries in Europe, including Norway, France, Sweden and Finland. Both Norway and France, countries nearing gender parity on their public boards, have enacted gender quota legislation requiring that women hold at least 40 per cent of the seats on such company’s boards of directors.
GENDER DIVERSITY AND ESG STANDARDS
Increased gender diversity on boards has been linked to increased profitability, better stock price performance and increased overall corporate performance. Furthermore, research suggests that gender diverse boards perform better in ESG categories and tend to be more likely to make environmental disclosures. For instance, boards with greater gender diversity have been linked to increases in the likelihood of voluntary climate change disclosure and commitment.
Increased gender diversity on boards has also been linked to better corporate social responsibility (CSR). A company’s CSR activities are intended to have a positive impact on broader social goals beyond just the company’s immediate financial performance. CSR has been found to positively impact a corporation’s general reputation. In this way, increasing the number of women on boards may not only increase a company’s success in meeting other ESG factors, but its overall performance and reputation.
THE CANADIAN APPROACH
In Canada there is a combination of legal disclosure requirements and institutional pressures that influence companies to increase the representation of women on their boards. Securities law requires “comply or explain” disclosure, regarding the representation of women on boards and in executive positions, by non-venture public companies (Form 58-101F1 Corporate Governance Disclosure) and the Canada Business Corporations Act (CBCA) and the corresponding regulations broaden the “comply-or-explain” disclosure regime for CBCA corporations to also include venture issuers and public companies listed only on a stock exchange outside of Canada (see our July 2019 Blakes Bulletin Additional Diversity Disclosure Required of CBCA Corporations in 2020).
There are also institutional influences in Canada that pressure companies to increase the representation of women on their boards:
Proxy Advisory Firms, such as Institutional Shareholder Services Inc. (ISS) and Glass Lewis & Co. (Glass Lewis) have adopted voting guidelines geared towards the inclusion of women on boards. For instance, commencing February 2022 for issuers in the S&P/TSX Composite Index, ISS will generally recommend that shareholders “withhold” their votes from the election of particular directors if: (i) women comprise less than 30 per cent of the board of directors; and (ii)(A) the issuer has not disclosed a formal written gender diversity policy; or (B) the issuer's formal written gender diversity policy does not include a commitment to achieve at least 30 per cent women on the board over a reasonable timeframe (see our January 2021 Blakes Bulletin 2021 Proxy Advisory Firm Voting Guidelines: Canadian Highlights). ISS has also recently proposed revising this policy to generally recommend that shareholders “withhold” their votes from the election of particular directors at a company that does not disclose a commitment to achieving a board with at least 30 per cent women “at or prior to the next AGM” rather than “over a reasonable timeframe”.
The Modernization Task Force (the Taskforce) established by the Ontario government advanced recommendations regarding the inclusion of women on boards. The Taskforce suggested requiring public companies to set goals and implementation timelines for gender diversity among directors and executive management and to report annually on the levels of board and executive representation. It further recommended 50 per cent targets for women at board and executive levels, to be implemented within five years (see our February 2021 Blakes Bulletin Ontario Capital Markets Modernization Taskforce Issues Final Report).
The 50-30 Challenge is an initiative between the Canadian Government and organizations to increase the representation and inclusion of diverse groups within Canadian workplaces. Organizations participating aspire to achieve gender parity (50 per cent) on Canadian boards and in senior management. Over 1,200 organizations across Canada have joined the 50-30 Challenge.
Institutional investors in Canada have incorporated policies regarding diversity into their voting decisions and have communicated their expectations regarding gender diversity. Some large Canadian investors have amended their voting policies to require boards of the companies in which they are invested to have a minimum number of women. For example, each of British Columbia Investment Management Corporation, Caisse de dépôt et placement du Québec, Canada Pension Plan, OMERS, Ontario Teachers' Pension Plan and RBC Global Asset Management have adopted 30 per cent targets for women in their voting policies. Another example is that many of Canada’s institutional investors and leading professional services firms are members of the Canadian 30% Club Investor Group. This group calls for 30 per cent female representation by 2022 on the boards and executive teams of companies that comprise the S&P/TSX composite index.
Pressure from institutional investors has also strengthened outside of Canada. BlackRock, an American multinational investment management corporation based in New York City, has pressured companies to make disclosures regarding gender diversity on their boards and increase female representation. In 2018, BlackRock sent letters to around 300 companies in the Russell 1000 Index with less than two women on their boards asking them to explain their lack of progress and disclose how they intend to increase gender diversity on their boards.
Further, the influential Board Games report published each year by the Globe and Mail Report on Business provides for two available points concerning board gender diversity, giving a company: (i) two marks if it discloses details of its policy concerning the representation of women on the board of directors and includes an internal target for the proportion of women on the board with specifics of the target details and a timeline for achieving the target; (ii) one mark if it discloses details of a process used to consider the representation of women on the board, such as recruitment practices aimed at ensuring female candidates are considered for board seats, but does not have a target or does not disclose a timeline for achieving a target; and (iii) zero marks if it does not have a diversity policy or does not describe specific steps it takes to ensure gender diversity is reflected in recruitment.
Despite Canadian legal disclosure requirements and institutional pressures, progress has been gradual. Based on a review conducted by the Canadian Securities Administrators (CSA) of the compliance with gender diversity disclosure requirements by 599 issuers with financial year-ends between December 31, 2020, and March 31, 2021, the overall percentage of board seats occupied by women increased from 20 per cent to 22 per cent, as compared to the prior year. Furthermore, 18 per cent of Canadian issuers still did not have a woman on their boards, and only 32 per cent of issuers had targets for the representation of women on their boards. With regards to executive officer positions, 67 per cent of issuers disclosed having at least one woman in an executive officer position, five per cent of issuers reported having a female Chief Executive Officer and 17 per cent reported having a female Chief Financial Officer.
THE INTERNATIONAL APPROACH
While the percentage of women on boards in Canada has risen slowly, Canada continues to fall behind countries in Europe. Norway and France have the highest percentage of board seats held by women, followed by Sweden and Finland. While Sweden and Finland have not enacted quotas, the countries with the highest percentage of seats held by women have enacted quotas. Certain states in the United States have also adopted quotas and other gender diversity requirements aimed at increasing the number of women on public boards.
Norway: In 2005, Norway became the first country to enact gender quota legislation for public limited companies, requiring women to make up at least 40 per cent of their boards. If a Norwegian board has two-three members, both sexes must be represented. If it has four-five members, there must be at least two members of each sex. If it has six-eight members, there must be at least three members of each sex. If it has nine members, there must be at least four members of each sex. If there are more than nine members, each sex must be represented by at least 40 per cent.
France: In 2017, France established a quota requiring 40 per cent of board members to be women. No sex can hold more than a two-seat difference with the other sex on French boards with eight or fewer directors. The quota applies to companies whose shares are traded on a regulated market, private companies with revenues or total assets over €50-million who have 250 or more employees for three consecutive years, and governmental organizations.
The United States: In 2018, California passed a law requiring that all locally headquartered publicly traded companies have at least one female director by the end of 2019. Boards with five members must have at least two female directors by the end of 2021 and boards with six or more members must have at least three female directors by the end of 2021. In 2020, Washington also passed a law requiring public companies incorporated in Washington to, by January 1, 2022, either have a board that is composed of at least 25 per cent of individuals who self-identify as female or provide shareholders with a board diversity discussion and analysis as to why the company has not reached 25 per cent. Similarly, in August 2021, the U.S. Securities and Exchange Commission approved new listing rules requiring Nasdaq-listed companies to have at least two diverse directors, one of which must be female. If the Nasdaq-listed company does not have a female director, it must explain why not.
Canadian companies may benefit from considering the progress of diverse boards internationally when making decisions relating to the nomination of board and appointment of executive members. As gender diversity on boards has been linked to increases in ESG standards and to corporate performance, Canadian companies may continue to see strengthening institutional pressures calling for them to get “on-board” with gender diversity on boards.
For more information, please contact:
Stacy McLean 416-863-4325
Kate McGilvray 416-863-2243
Matthew Merkley 416-863-3328
Mariangela Asturi 416-863-2296
or any other member of our Corporate Governance practice group.
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