In a new notice, the Canadian Securities Administrators (CSA) proposes to update the “comply or explain” disclosure regime concerning diversity on boards of directors and in executive officer positions at public companies in Canada. Specifically, the CSA proposes and solicits feedback on two alternative approaches that reflect a continuing divergence of views on this topic across Canada’s various provincial and territorial securities regulatory jurisdictions. Members of the public can submit comments until July 12, 2023.
Throughout this bulletin, “Notice” refers to CSA Notice and Request for Comment – Proposed Amendments to Form 58-101F1 Corporate Governance Disclosure of National Instrument 58-101 Disclosure of Corporate Governance Practices and Proposed Changes to National Policy 58-201 Corporate Governance Guidelines.
Effective December 31, 2014, National Instrument 58-101 – Disclosure of Corporate Governance Practices (NI 58-101) and Form 58-101F1 – Corporate Governance Disclosure (58-101F1) were amended to require disclosure by non-venture public companies in Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Ontario, Quebec and Saskatchewan of: (i) their policies regarding, and their consideration of, the levels of representation of women on boards and in senior management or explanation for the non-adoption of such policies or considerations; (ii) their actual and targeted, if any, numbers for such representation; and (iii) the presence or reasons for the absence of director term limits or other renewal mechanisms. These requirements, which Alberta and Yukon later adopted, still do not apply to public companies that report exclusively in British Columbia and Prince Edward Island. The CSA has regularly considered disclosure practices and key trends among issuers in its review of public disclosure of women on boards based on the foregoing requirements (see our November 2022 Blakes Bulletin: CSA Reports Further Progress on Advancement of Women on Boards).
Since January 1, 2020, public companies (including venture issuers) governed by the Canada Business Corporations Act (CBCA) have been required to provide additional diversity disclosure, modelled on the regime in 58-101F1, relating to the representation on boards and in senior management of certain “designated groups” defined under the Employment Equity Act (Canada), being Aboriginal peoples, persons with disabilities, members of visible minorities and women.
In January 2021, the Capital Markets Modernization Taskforce (Taskforce) established by the Ontario government issued its final report. The Taskforce suggested requiring public companies to set goals and implementation timelines for diversity among directors and executive management and to report annually on the levels of representation at the board and executive management of those identifying as women, BIPOC, a person with a disability or LGBTQ+. The Taskforce further recommended that appropriate target levels for representation at the board and executive management levels are 50% for women and 30% for BIPOC, persons with disabilities and LGBTQ+. Other Taskforce proposals aimed at increasing diversity included adopting a maximum term limit of 12 years for directors of public companies, with certain exceptions.
Under the Notice, the CSA is seeking comments on two approaches that build upon the existing diversity disclosure requirements in 58-101F1 (Alternative A and Alternative B). Although British Columbia and Prince Edward Island have not adopted the current requirements, all jurisdictions are participating in the consultation pursuant to the Notice, with a view to adopting the finalized, updated regime.
The CSA states that the proposed alternatives reflect its commitment to ensuring investors have the information they need to make informed investment and voting decisions. The main objectives of the proposals are to: (i) increase transparency about diversity, including diversity beyond women, on boards and in executive officer positions; (ii) provide investors with decision-useful information that enables them to better understand how diversity ties into an issuer’s strategic decisions; and (iii) provide guidance to issuers on corporate governance practices related to board nominations, board renewal and diversity.
In the CSA’s view, Alternative A and Alternative B have similar disclosure requirements related to board nominations and board renewal. They reflect different approaches, however, to disclosure regarding the representation of members of diverse groups: Alternative B takes a similar approach to the CBCA by mandating disclosure on specific “historically unrepresented groups,” while Alternative A follows a less prescriptive approach.
Each alternative also has corresponding proposed changes to the CSA commentary in National Policy 58-201 – Corporate Governance Guidelines intended to address: (i) the responsibilities of the nominating committee; (ii) the written policy respecting the director-nomination process; (iii) the use of a composition matrix; (iv) effective succession planning and the mechanisms of board renewal, including term limits; (v) the written diversity policy; and (vi) targets for achieving diversity on the board and in executive officer positions.
Both Alternative A and Alternative B continue to require disclosure in respect of women, rather than the broader concept of gender. However, each alternative proposes drafting to eliminate some, but not all, uses of gendered pronouns.
The securities regulatory authorities in each of Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Nunavut, Prince Edward Island, Quebec and Yukon have not expressed a preference on the public record for either of the proposed alternatives at this time.
The securities regulatory authorities in Alberta, British Columbia, the Northwest Territories and Saskatchewan are on the record as supporting Alternative A.
Alternative A’s approach is based on a view among certain members of the CSA that securities regulators should not select categories of diversity, other than women. It leaves the issuer to determine which aspects of diversity are most beneficial to advancing the issuer’s business and strategy.
Alternative A would require an issuer to disclose its approach to diversity in respect of the board and executive officers, but it would maintain current practice by not mandating disclosure in respect of any specific groups, other than women. An issuer would be required to describe its chosen diversity objectives and its method for measuring progress. It would also have to explain the mechanisms by which it plans to achieve its diversity objectives. More specifically, the issuer would be required to disclose “the actual target number or percentage, or range of numbers or percentages the issuer has set, the timeframe for achieving the target and the annual and cumulative achievement of the target.” If an issuer chooses to collect data with respect to specific groups it identifies as being relevant for its approach to diversity, this data must be disclosed in a manner determined by the issuer. The CSA believes this might avoid limitations on completeness of disclosure arising from the use of information gathered through voluntary self-identification, although this issue may still arise from the categories ultimately chosen by the issuer.
As drafted, Alternative A proposes to note that the groups about which an issuer provides disclosure “can include, without limitation, Indigenous peoples, persons with disabilities, members of visible minorities, members of the LGBTQ2SI+ community and members of linguistic minorities” (Potential Group Examples). Notably: (i) these terms are not defined (e.g., does linguistic minority depend on the individual’s geography? is it based on an individual’s primary language or fluency in a secondary language?); (ii) LGBTQ2SI+ and members of linguistic minorities are not currently designated groups under the CBCA requirements; and (iii) the concept of linguistics would expand diversity into the area of learnable skills (e.g., education, experience and expertise).
The Ontario Securities Commission is on the record as supporting Alternative B.
Alternative B contemplates mandatory reporting on the representation of five designated groups on boards and in executive officer positions: women, Indigenous peoples, racialized persons, persons with disabilities and LGBTQ2SI+ persons (each of which is a defined term). This expands on the current prescriptive approach with respect to women under securities laws and Aboriginal peoples, persons with disabilities, members of visible minorities and women under the CBCA. Under Alternative B, an issuer may also choose to voluntarily provide disclosure in respect of other groups beyond the designated groups. The issuer would have to report this data in a detailed, standardized tabular format to promote consistent and comparable disclosure. The information to be disclosed would largely match that of Alternative A. Additionally, Alternative B would require the issuer to disclose any measurable objectives tied to its written strategy relating to the representation of the designated groups. All information reported would be based on voluntary self-disclosure by directors and executive officers.
Although the categories in Alternative A’s Potential Group Examples do not directly map to the designated groups in Alternative B, one notable distinction is the absence of “members of linguistic minorities” as a required category in Alternative B. The emerging practice of some Quebec-based seasoned issuers to disclose the language proficiency of their directors may broaden the discussion on the relevance of such disclosure.
Institutional Shareholder Services (ISS) has updated its voting guidelines for TSX-listed issuers for meetings of companies in the S&P/TSX Composite Index held on or after February 1, 2024. Going forward, ISS will generally recommend that shareholders vote against, or withhold their votes from, the election of the chair of an issuer’s nominating committee where the board has no apparent racially or ethnically diverse members. ISS notes that an exception will be made if there was racial and/or ethnic diversity on the board at the preceding annual meeting and the board makes a firm public commitment to appoint at least one racially and/or ethnically diverse member at, or prior to, the next annual general meeting of shareholders. ISS will also evaluate on a case-by-case basis whether against/withhold recommendations are warranted for additional directors at issuers that fail to meet such policy over two years or more.
The Globe and Mail’s influential Report on Business Board Games report for 2022 devoted 13 of a possible 100 points to matters concerning board diversity, with a possible seven points being awarded for gender diversity and a possible six points being awarded for diversity beyond gender.
The taskforce established by the Government of Canada to review the Employment Equity Act (Canada) is expected to deliver its report to the Minister of Labour in the spring of 2023. The taskforce, which the government formed in support of its stated commitment to create equitable, diverse and inclusive workplaces, completed its consultation last year. Part of its mandate is to consider the nomenclature regarding the existing designated groups within the Employment Equity Act (Canada) and the addition of further groups, including LGBTQ2SI+ communities.
The Notice solicits comments on the proposed alternatives and seeks feedback on, among other things, “which approach best meets the needs of stakeholders” as well as whether the CSA should consider developing similar disclosure requirements for venture issuers in a second phase. The public comment period is set to end on July 12, 2023. Given the current lack of consensus among members of the CSA, it could take some time before any amendments are finalized and adopted.
For more information, please contact:
Matthew Merkley +1-416-863-3328
Pascal de Guise +1-514-982-4119
Jeremy Ozier +1-416-863-5824
Élykia Makwanda +1-514-982-4115
or any other member of our Capital Markets or Corporate Governance groups.