SECURITIES REGULATION & IR

In preparation for the upcoming proxy season, here are some key developments in corporate governance and disclosure requirements impacting Canadian public issuers.

1. Proxy Advisory Firm Guidance

Proxy advisory firms, such as Institutional Shareholder Services (ISS) and Glass Lewis & Co., LLC (Glass Lewis), release proxy voting guidelines, which are updated annually. The updates to the guidelines reflect industry trends and evolving shareholder needs and can influence how institutional shareholders vote. Key updates to these guidelines include:

A: Diversity

For companies on the S&P/TSX Composite Index, ISS will, starting from February 1, 2022, recommend withhold votes for the Nominating Committee Chair if women comprise less than 30% of the Board and the company has not disclosed a formal written gender diversity policy, or the company's formal policy does not include a commitment to achieve at least 30% women on the Board over a reasonable time frame.

It has been over a year since the enhanced diversity disclosure requirements of the Canada Business Corporations Act (CBCA) came into force. Corporations Canada has published detailed guidelines on its website to help corporations governed by the CBCA to disclose their diversity information in a more consistent manner. The guidelines encourage the use of table format and provide examples of diversity disclosure.

Regarding the quality of disclosure in general, Glass Lewis will hold the Chair of the Governance Committee responsible for poor disclosure standards, and will assess the quality and clarity of disclosure around diversity for CBCA corporations.

The Final Report published by the Ontario Capital Markets Modernization Taskforce recommended that publicly listed issuers set an aggregated target of 50% for women and 30% for BIPOC, persons with disabilities and LGBTQ+, and a five-year implementation period to meet the target for women and a seven-year period to meet the target for the other diversity groups, placing specific focus and emphasis on representation of Black and Indigenous groups.

B: Board Oversight of Environmental and Social Risks

ISS has added environmental and social risks in the examples of material failure of risk oversight justifying a negative recommendation against individual Board members, committee members, or the entire Board under extraordinary circumstances.

In the same vein, Glass Lewis will note as a concern when Boards of companies in the S&P/TSX 60 index do not provide clear disclosure concerning the Board-level oversight afforded to environmental and/or social issues. For shareholder meetings held after January 1, 2022, Glass Lewis will generally recommend voting against the Governance Chair of issuers who fail to provide explicit disclosure concerning the Board’s role in overseeing these issues.

C: Board Refreshment and Board Skills

Beginning in 2021, Glass Lewis will note as a potential concern instances where the average tenure of non-executive directors is 10 years or more and no new independent directors have joined the Board in the past five years. Although Glass Lewis will not be making voting recommendations solely on this basis in 2021, insufficient Board refreshment may be a contributing factor where additional Board-related concerns have been identified (for example, lack of diversity). Glass Lewis may recommend voting against the Chair of the Nomination Committee if a Board has not addressed major issues relating to Board composition.

2. Environmental, Social and Governance Disclosure

With the growth of sustainable finance and rise of stakeholder capitalism, investors are demanding better disclosure on ESG matters. On November 25, 2020, the CEOs of the eight largest Canadian pension funds issued a joint statement requesting corporations to provide ESG disclosure in a standardized fashion. The pension funds have urged companies to use the Sustainability Accounting Standards Board (SASB) standards and the Task Force on Climate-related Financial Disclosures (TCFD) framework to streamline disclosure around ESG factors.

Although most of the ESG disclosure (other than issues such as diversity and executive compensation) is not required by law, issuers and their directors and officers could be legally liable if such disclosure contains a misrepresentation. With the increasing focus on better ESG disclosure, it is expected that there will be increasing scrutiny on ESG disclosure.

It is worth noting that in August 2020, the U.S. Securities and Exchange Commission adopted amendments to disclosure rules to require disclosure around human capital management.

3. Cybersecurity

The COVID-19 crisis and the increasing reliance on technology have exacerbated the threats of cyber incidents. Although cybersecurity risk has been on the radar of Boards and management for several years now, Boards are increasing paying attention to cyber risks, with an increasing number of Boards assigning the responsibility for the oversight of cybersecurity issues to the Audit Committee (see data from this EY Report). Cybersecurity related experience is now sought after on the Board itself; therefore it is worth specifying in the disclosure on Board skills whether any directors have cybersecurity-related experience.

David Frost is a Partner at McCarthy Tétrault LLP. This article was written with co-author Xin Gao (Associate) at McCarthy Tétrault LLP.