David Frost, McCarthy Tetrault LLP
Investors and regulators have become increasingly focused on diversity within the boardroom and, at the senior management level, how public issuers disclose data on their diversity and inclusion practices. Recently, there has been a spotlight on racial discrimination against individuals who identify as Black, Indigenous, or Persons of Colour (BIPOC). The recent Black Lives Matter movement has called upon non-BIPOC individuals to speak out and act against violent and non-violent discrimination, and to become part of the solution. Corporate Canada can play a part in this social movement. Just this year, public issuers governed by the Canada Business Corporations Act (CBCA) were required for the first time to disclose certain diversity data. This forced some issuers to evaluate their diversity initiatives and confront the underrepresentation of BIPOC individuals, persons with disabilities and members of visible minorities within their organizations. The CBCA disclosure requirements, which came into effect on January 1, 2020, aim to increase corporate diversity and transparency, effectively broadening the current ‘comply-or-explain’ regime provided under the securities regulations for gender diversity. Issuers have to self-report information about women, Indigenous people, persons with disabilities and members of visible minorities on their Boards and in senior management roles. Issues related to diversity practices and the disclosure of diversity data aren’t restricted to CBCA-governed issuers; all public issuers should evaluate their diversity initiatives and practices and carefully review and consider their diversity disclosure. Diversity and how diversity data is disclosed should be prioritized as remaining silence on these issues simply isn’t an option.
Best practices for diversity and diversity disclosure
1. Full and honest disclosure
Transparent disclosure of diversity data and actions related to diversity and inclusion initiatives is now becoming an expectation of investors. Issuers should elect full and honest disclosure of diversity data and statistics regarding their Boards and senior management roles, with respect to women, Indigenous people, persons with disabilities, and members of visible minorities, including individuals who identify as Black or as persons of colour. Additionally, making false or misleading statements in diversity disclosures may expose an issuer to liability. For example, a shareholder recently filed a complaint with the United States federal court, alleging that an issuer made false statements about its commitment to diversity and such false statements constitute securities fraud. While the case has not yet been decided, it is an example of shareholder activism on these issues.
2. Confront the numbers
The diversity data for Board members and senior management may be less than satisfactory. In fact, a preliminary analysis of the CBCA diversity disclosure data shows that visible minorities are greatly underrepresented in the boardroom. Instead of shying away from this, issuers should commit resources to improving diversity within their organizations and disclose the initiatives and practices adopted in furtherance of such commitment.
3. Adopt a written diversity policy or expand the current policy
Every issuer should consider adopting a written policy that addresses the hiring, retention and advancement of diverse peoples, including at the Board and senior management level. Some issuers may already have a written diversity policy addressing gender diversity at their organization. However, this policy should be expanded to include other designated groups, including those mentioned in the CBCA diversity disclosure requirements. A strong diversity policy provides a framework for an organization to improve diversity and enables the issuer to disclose the formal steps taken to address diversity issues.
Expected developments on diversity and diversity disclosure
1. Increased regulation of diversity
While the CBCA requires the disclosure of diversity data, diversity initiatives and targets are largely unregulated. This is likely to change. In fact, an Ontario Taskforce formed by the Minister of Finance made recommendations in July 2020 for drastic changes to the ‘comply or explain’ regime, which would force companies listed on the TSX to set diversity targets and provide data on their progress. The use of legislated quotas to address diversity disparities in the boardroom is not a novel concept. For example, Norway and France adopted in 2008 and 2011, respectively, gender quotas that require corporate Boards to maintain 40% female Board representation.
2. Expansion of proxy guidelines
ISS and Glass Lewis may expand their guidelines for Board composition and diversity beyond gender to include other designated groups. Current proxy voting guidelines only contemplate gender diversity in terms of policies and inclusion of female members on Boards, but there are signs that this is likely to change. ISS has urged companies to voluntarily disclose the ethnicities of their directors and senior executives, which indicates that a general voting recommendation on an ethnic diversity policy may be adopted. Issuers should consider this potential development as an opportunity to implement actions that are likely to be consistent with future guidelines, such as disclosing the ethnicity of Board members and including ethnicity in the organization’s written diversity policy. Issuers that are progressive and lead the way with diversity and inclusion initiatives should also benefit by attracting broader talent.
3. Increased shareholder interest in concrete corporate commitments to diversity
In recent months, the societal push for racial equality has been strong. Many people are reflecting on systemic racism and how we can break down barriers for BIPOC individuals, but it is not just governments being held to this standard. Issuers are facing the same scrutiny and investors and regulators are curious about whether they are upholding existing oppressive structures or advancing the objectives of equality. These issues are on the minds of many stakeholders and they may push for concrete corporate commitments, similar to targets that many issuers set in terms of gender diversity.
4. Other jurisdictions may follow in the CBCA’s footsteps
While many issuers may be voluntarily disclosing their diversity data, only those governed by the CBCA are required to disclose diversity data beyond gender. Other corporate regulators may adopt and impose diversity disclosure obligations, similar to those required under the CBCA, on the public issuers that they oversee.
In a recent interview with Bloomberg with respect to Black representation in Canadian corporations, Wes Hall, Executive Chairman and Founder, Kingsdale Advisors, stated: “This is not a blip on the radar screen. This is a movement…We are not going back.” Issuers should prioritize diversity and inclusion initiatives and focus on fulsome and transparent diversity disclosure, with a goal of being leaders in the movement.
David Frost is a Partner at McCarthy Tétrault LLP. This article was written with co-author Alexandra Comber, Summer Articling Student at McCarthy Tétrault LLP in Vancouver.