SECURITIES REGULATION AND IR

On June 7, 2015, Catalyst Inc. released a report commissioned by the Government of Ontario entitled “Gender Diversity on Boards in Canada: Recommendations for Accelerating Progress” (the “Catalyst Report”). The Ontario Government accepted all of the 11 recommendations set out in the Catalyst Report and announced that it would require all of its agencies, Boards, Commissions and Crown Corporations to have 40% female directors by 2019.

The Catalyst Report made the following six recommendations aimed at companies and business leaders:

1. Set specific targets by the end of 2017 and achieve the targets within three to five years. For all companies that have at least one woman director, the target should be 30% women directors. For all companies that have no women directors, the target should be one woman director.
2. Use at least one mechanism, such as director term limits and/or age limits, to facilitate Board renewal.
3. Establish a written policy describing how the company specifically plans to increase representation of women on its Board.
4. Review Board recruitment policies to (i) require that lists of potential Board candidates consist of at least 50% women candidates with the skills and profiles sought, and include women from diverse communities; (ii) require that women, including women from diverse communities, comprise at least 50% of the interview pool for every open Board position; (iii) implement Board effectiveness assessments, including gap analysis using skills matrices; and (iv) leverage broad networks to connect supply with demand.
5. Champion senior executive women for Board service by (i) reassessing and removing restrictions on external Board service; and (ii) implementing programs to match talent with Board vacancies for both executive and non-executive director seats.
6. Address gender equity at all levels of the organization by (i) reviewing, on a continual basis, recruitment, promotion and talent development systems to ensure that they are unbiased; (ii) investing in inclusive leadership training; (iii) monitoring and tracking promotion rates, aiming for proportional promotion and retention at each level; and (iv) evaluating and addressing pay equity by conducting periodic pay equity studies to determine if there are wage gaps and if there are, providing funds to rectify them; implementing ‘no negotiations’ policies and paying for work, not potential; and adopting pay transparency policies.

The Catalyst Report also made the following five recommendations aimed at government:

1. Drive greater awareness among broader stakeholder groups and the general public by implementing an action-oriented public awareness campaign.
2. Reinforce and encourage the setting of specific targets, Board renewal mechanisms, and written policies as a strong call to action for issuers.
3. Ensure progress continues to be tracked and published, as the Ontario Securities Commission (“OSC”) has done, on an annual basis to maintain transparency of corporate governance practices relating to the representation of women.
4. If sufficient progress is not made, particularly toward the 30% target, consider more stringent legislative or regulatory approaches.
5. Model exemplary behaviour by reviewing appointments to their own agencies, Boards, Commissions and Crown Corporations, and setting a minimum goal of at least 40% women on these bodies by the end of 2019.

On June 13, 2016, less than one week after the Catalyst Report was released, the Honourable Kathleen Wynne, Premier of Ontario, expanded and shuffled her Cabinet so that 40% of the Cabinet is now comprised of women.

Two days after the Catalyst Report was released, the shareholders of Restaurant Brands International Inc. (“RBI”), the multinational owner of Burger King and Tim Hortons, voted against a proposal brought by OceanRock Investments Inc. (“OceanRock”) and Shareholder Association for Research and Education (“SHARE”), which asked RBI to adopt and publish a formal, written Board diversity policy and to report to shareholders on the Board’s plans, timelines, processes and activities for increasing gender diversity on the Board of directors and among senior management. Prior to the 2014 merger with Burger King, Tim Hortons had three women on its 12-person Board. Post-merger, RBI has no women on its Board of directors and does not have a formal written policy relating to the identification and nomination of women directors, nor does it have a formal written diversity policy.

In the RBI management information circular for its 2016 annual meeting, RBI responded to the shareholder proposal as follows:

“The Board has carefully considered the shareholder proposal and has determined not to make a recommendation either in favour of or opposed to the proposal.

In response to the shareholder proposal, our Board and the NCG Committee decided to amend the NCG Committee’s Charter and our Governance Guidelines to enhance our new director nomination process in a manner we believe both supports Board diversity and is responsive to the concerns outlined in the shareholder proposal. In evaluating prospective new directors candidates for recommendation to the Board, our Governance Guidelines, as amended, require the NCG Committee to consider diverse candidates in terms of race, gender, geography, thought, viewpoints, backgrounds, skills, experience and expertise. Pursuant to the NCG Committee’s Charter, as amended, any search firm retained to assist the NCG Committee in seeking new director candidates for the Board will be instructed to seek to include diverse candidates who possess these qualifications and criteria. These qualifications and criteria are aimed at identifying candidates who are diverse with respect to race, gender and background and who also possess the qualifications and attributes that will best perpetuate the success of the business and serve as the foundation for an effective director.”

Not surprisingly, SHARE was not satisfied with RBI’s response to its proposal. SHARE stated that while the amendments described in RBI’s management information circular for its 2016 annual meeting are a positive step, they do not address in any meaningful way the company’s plans, timelines and activities for increasing gender diversity on the Board and in senior management, nor do they indicate that the Board has the goal of actually increasing its diversity or that it will use effective processes and indicators for developing and advancing women candidates for the Board and senior management.

To put RBI’s response to the proposal brought by OceanRock and SHARE in context, RBI is not the only public company in Canada with an all-male Board. In September 2015, the Canadian Securities Administrators (“CSA”) released CSA Multilateral Staff Notice 58-307 – Staff Review of Women on Boards and in Executive Officer Positions — Compliance With NI 58-101 Disclosure of Corporate Governance Practice, explaining  the CSA found that of the 722 TSX listed issuers examined, 49% had at least one woman on the Board, which means that 51% had no women on the Board.

In a recent article by Robert Thompson entitled You gotta own it[1], the author describes how Cameco Corp. made the transition from doing ‘diversity by compliance’ to having a ‘culture of diversity’. Fostering a culture of diversity is predicated on businesses seeing the value of diversity to their organizations so that women are advanced not because there are legislative or regulatory requirements but because it is good for business. In order to encourage more businesses to promote women we need business leaders to lead the way by championing and promoting women within their organizations. 

The Catalyst Report describes how diversity has been promoted in the Canadian banking industry and in various foreign jurisdictions, including the United Kingdom, Australia, Norway and the United States.

According to the Catalyst Report, business leaders within the Canadian banking sector have been championing gender diversity since the early 1990s. In 2014, women occupied 34.5% of senior management positions and 50% of all middle management positions at Canada’s six largest banks. Among Canada’s five largest banks, women hold 33.8% of Board seats. It is believed that one of the factors that account for the banking industry’s relative success in increasing the representation of women on Boards is the federal Employment Equity Act of 1995 (“EEA”), which requires banks to collect and report diversity data, set goals, and implement and maintain an employment equity plan to meet these goals. This legislation is similar to the OSC’s ‘comply or explain’ requirements implemented in December 2014, with one notable exception, namely that the EEA does not specifically apply to Boards of directors. Interestingly, Canada’s banks have increased the number of directors without legislation.

In the United Kingdom, a 2011 report entitled Women on Boards[2] by Lord E. Mervyn Davies included 10 recommendations related to the issue of advancing women and recommended that FTSE 100 companies aim for a minimum target of 25% women on Boards by 2015. In his report, Lord Davies cautioned that government “must reserve the right to introduce more prescriptive alternatives if the recommended business-led approach does not achieve significant change.” In 2012 the U.K. adopted many of Lord Davies’ recommendations by amending its corporate governance code to create a ‘comply or explain’ model for gender disclosure. The regulation requires companies to disclose their Boards’ policy on diversity, including gender, as well as any measurable policy implementation plans and progress on achieving their plan objectives. In the U.K. the representation of women on FTSE 100 Boards more than doubled from 12.5% in 2011 to 26.1% in 2015. According to the Catalyst Report, the U.K.’s success in bolstering women on Boards without quotas can be linked to a number of strategies and actions taken by the government regulators and the broader business community. The high visibility leadership of Lord Davies and his ability to encourage business leaders around the world to work together to avoid forced quotas are seen as important factors in the effectiveness of increasing the representation of women on Boards. Other important factors have been the U.K. government’s unprecedented level of support for Lord Davies’ report in setting targets, measuring progress, and highlighting progress in an annual report. As of October 2015, no FTSE 100 company has an all-male Board.

Since 2011, the Australian Securities Exchange (“ASX”) has required all publicly traded companies to follow an ‘if not, why not’ model to increase the number of women on Boards. This approach is most similar to the ‘comply or explain’ approach adopted by Canadian securities regulators. Under the ASX rules, companies must establish a diversity policy, make it publicly available and disclose measurable objectives for and progress toward achieving it, or explain why they have not taken those steps. They must also annually disclose the proportion of women in the organization, including women in senior executive positions and women on the Board. In 2012, the Australian government passed the Workplace Gender Equality Act to improve and promote equality for both women and men in the workplace. This legislation requires companies to report on efforts to increase the participation of women in their workplaces and, in particular, to report the gender composition of their Boards. The representation of women on the Boards of public companies in Australia has increased from 10.7% in 2010 to 22.7% in 2016, and women comprised 34% of new appointments to ASX 200 Boards in 2015. According to the Catalyst Report, strong corporate leadership has played an important role in Australia’s progress regarding advancing women, by providing highly transparent and granular corporate disclosures.

In 2003, Norway implemented gender quotas for Board directors requiring at least 40% representation of women on public Boards. Companies were given until 2008 to meet the quota and threatened with serious penalties for noncompliance. While the law was fiercely debated and initially met with strong opposition, the Norwegian government announced full compliance in 2008. In 2002, 6.8% of the directors of Norwegian public limited companies were women. It is interesting to note that in 2002, 470 out of 611 companies had no women Board members at all. One criticism of Norway’s quota approach is that while it has boosted the number of women on Boards, the gains at the top have not cascaded down to women below Board level. One study observed no statistically significant change in women’s representation in top positions. 

Since 2010, the United States Securities and Exchange Commission (“SEC”) has required publicly traded companies to disclose whether and how they consider diversity when identifying Board candidates. If a diversity policy exists, the company must disclose both how it is implemented and how its effectiveness is assessed. Notably, the regulation requires companies to explain their diversity policy only if they have one. If companies do not consider diversity when identifying Board candidates, then no explanation needs to be given as to why not. Most companies in the U.S. have disclosed that they do in fact consider diversity when appointing directors. However, only about half of those companies have defined diversity in sociodemographic terms of gender, race or ethnicity. Others have adopted their own definition of diversity, with most citing prior director experience, rather than sociodemographic characteristics. Law professor Aaron Dhir has recommended that the current U.S. rule be amended to include a definition of diversity that incorporates sociodemographic characteristics and that the SEC adopt a ‘comply or explain’ approach to diversity disclosure.[3]

One common theme that emerges from the Catalyst Report is that if we want more women to advance in the workplace we need government and business leaders to work together to support initiatives that advance women and demonstrate this support by actually advancing women into leadership positions. In a nutshell, we need government and business leaders to lead by example.