SECURITIES REGULATION & IR

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

1. Trends in ESG Reporting

     (a) Mandatory Climate Risk Disclosure

With an aim to standardize climate-related disclosure for reporting issuers and ensure such disclosure is comparable and 'decision-useful' for investors, the Canadian Securities Administrator (CSA) developed proposed National Instrument 51-107 – Disclosure of Climate-related Matters (NI 51-107). As currently drafted, NI 51-107 will require climate-related governance disclosure in an issuer's management information circular and annual information form (AIF), or annual management's discussion and analysis if the issuer does not file an AIF.

As proposed, NI 51-107 will require issuers to disclose: organizational governance around climate-related risks and opportunities; actual and potential impacts of climate-related risks and opportunities on the issuer's business, strategy and financial planning; the metrics and targets the issuer used to assess and manage relevant climate-related risks; and how the issuer identifies, assesses and manages climate-related risks. Notably, proposed NI 51-107 does not require an issuer to submit scenario analyses or greenhouse gas (GHG) emissions reporting, but instead will require issuers to disclose or explain reasons for not disclosing GHG emissions and related risks.

     (b) Social and Corporate Governance

As investors, stakeholders, management and Boards of Directors are taking greater interest in an issuer's ESG policies, targets and mandates, there is increased support among capital market participants for including ESG metrics, as well as diversity, equity and inclusion measures, in both short-term and long-term executive compensation programs. 

As a result, managements – and in particular, CEOs – are being looked to as advocates for various social causes and on political subjects, including some not directly associated with the issuer's business. Management should consider adopting a policy or strategy regarding when and how management should respond to social and political issues to ensure that engagement on these issues is well thought out and in the best interests of the organization and its stakeholders.

In October 2021, the OSC hosted a virtual roundtable considering diversity beyond gender on corporate Boards, which focused on targets, term limits and diversity data. Key themes from the discussion included but were not limited to: (i) expanding the definition of "diversity" to include Indigenous peoples, persons with disabilities and visible minorities as well as LGBTQ2S+ and other groups; (ii) expanding diversity targets beyond the Board and senior management; and (iii) the implementation of robust succession planning and a skills matrix to promote diverse hiring to fill vacant positions rather than creating additional positions. Such themes were echoed in the Capital Markets Modernization Taskforce's final report with respect to its review of the current status of Ontario's capital markets, acknowledging increased interest in ESG factors, progress made in achieving Board diversity and increased shareholder activism. The Taskforce made several recommendations in light of these themes and findings.

2. Virtual Considerations

     (a) Cybersecurity Disclosure

Work-from-home and hybrid work models have brought increased demand for cyber insurance to help mitigate cybersecurity risks. It is expected that cyberattacks will increase throughout 2022. During an October 2021 webcast by PricewaterhouseCoopers LLP on cyber risk oversight, a panelist recommended that management provide Boards with a matrix addressing the magnitude of a cybersecurity risk, the level of priority management assigns to it and the amount of money being invested so that Boards can properly identify risks and identify misalignments. Issuers are reminded of their disclosure obligations, in light of the CSA's Multilateral Staff Notice 51-347 – Disclosure of Cyber Security Risks and Incidents, to understand where risks come from that may affect their business and consider cybersecurity protocols and management.

     (b) Virtual Meetings

Going into the 2022 proxy season, there remains uncertainty about whether issuers will conduct in-person meetings or go with a hybrid or fully virtual format, as has been the case in the last two proxy seasons. On February 25, 2022, the CSA provided recommendations to assist issuers that intend to proceed with virtual or hybrid meetings. Issuers are advised to provide clear and detailed disclosure in proxy materials regarding how investors access the meeting, participate and vote. The recommendations also include providing disclosure to address how the issuer will deal with participation and questions at the meeting, as well as contact information for assistance with meeting logistics. 

Additionally, and further to concerns found by ISS in a query of market participants, the CSA encourages issuers to enable, to the fullest extent possible, the same level of shareholder participation at a virtual or hybrid meeting as would be available at an in-person meeting. This includes providing opportunities to make motions, raise questions and provide feedback to management and the Board.

3. COVID-19 Disclosure Requirements

The CSA suggests issuers include meaningful COVID-19 disclosure in their continuous disclosure documents, including discussion and analysis of the measures taken to reduce the impacts of COVID-19 and how the issuer intends to address the impacts. Risk factors should be supplemented with issuer-specific risks in relation to the pandemic and boilerplate risk factor disclosure should be avoided. Issuers should present non-GAAP financial measures that are adjusted for the impact of COVID-19 and disclose the nature and extent of any government subsidies it has received.

Issuers are reminded to disclose how any forward-looking information (FLI) in relation to COVID-19 was derived and the risks associated with such FLI. As well, the FLI should be updated if there are events or circumstances likely to cause actual results to differ from previously disclosed FLI. Issuers should be cognizant of governmental or regulatory policies that may uniquely or significantly impact an issuer. Finally, issuers are reminded that they may not be required to file a material change report if COVID-19 has had an equal effect on companies in the issuer's industry.

David Frost is a Partner at McCarthy Tétrault LLP. This article was written with co-authors Jessica Brown (Partner) and Jeremy Pleasant (Partner) at McCarthy Tétrault LLP.