SECURITIES REGULATION & IR

In preparation for the 2023 proxy season, here are some key developments in corporate governance and disclosure requirements impacting Canadian reporting issuers.

1.  Trends in ESG Reporting

(a)  Environment Disclosure

Climate-related risk disclosure continues to be on the radar of investors and regulators, and the types of risks that ought to be disclosed are increasingly wide-ranging.

Glass Lewis, in its 2023 Policy Guidelines suggests that Canadian companies should consider the environmental risks associated with both their company-specific operations, like greenhouse gas emissions and oil and gas spills, and the effects of broader environmental risks, like extreme climate events. Disclosure should be comprehensive, including explaining the risks, how the risks are mitigated and overseen, and the Board’s role and responsibilities in overseeing such risks.

Companies, however, should exercise caution and avoid overly promotional, vague, and misleading disclosures regarding environmental, social and governance (ESG) matters. In particular, ‘greenwashing’ is a concern identified by the Canadian Securities Commission (CSA) in its biennial review for the fiscal years ended March 31, 2022 and 2021. The CSA recommends that statements regarding ESG matters should be substantiated by facts and context. For example, when citing ratings and other metrics, the actual rating should be disclosed and it should be clear what specific set of criteria the rating is based on and which, if any, third party certified the rating.

As an update on the proposed National Instrument 51-107 – Disclosure of Climate-related Matters, on October 12, 2022, the CSA released a statement that it is actively considering international developments (specifically, the Securities and Exchange Commission (SEC) and International Sustainability Standards Board proposals regarding climate-related disclosure) and how they may impact the proposed climate-related disclosure rule.

(b)  Board Diversity Disclosure

Canadian companies should continue to carefully consider their disclosure regarding Board diversity, which continues to be a focus for Glass Lewis, Institutional Shareholder Services Inc (ISS), Canadian securities regulators and under the Canada Business Corporations Act. If a Board is not diverse, the recommended best practice is to address through disclosure by providing a rationale and plan or commitment to increase diversity membership, which may mitigate undesirable shareholder voting or be considered by a proxy advisory firm when deciding how to recommend voting.  

For shareholder meetings held after January 1, 2023, Glass Lewis will generally recommend voting against the Chair of the Nominating Committee of a Board of a company on the TSX that is not at least 30% gender diverse, or the entire Nominating Committee of a Board with no gender diverse directors. Glass Lewis defines gender diversity as women and directors that identify with a gender other than male or female.

ISS is considering (https://www.issgovernance.com/file/policy/2022/2023-Benchmark-Policy-Changes-For-Comment.pdf) new proxy guidelines for 2024 meetings that would generally recommend a vote against the Chair of the Nominating Committee (or equivalent) of any issuer in the S&P/TSX Composite Index where the Board has no apparent racially or ethnically diverse members. Racial or ethnic diversity includes Aboriginal peoples and members of visible minorities (each as defined in the Employment Equity Act (Canada)).

(c)  Executive Compensation Disclosure

Comprehensive and timely disclosure regarding senior executive compensation, and the performance metrics used to determine such compensation, is increasingly important to investors and shareholders. Legislation is keeping pace with this trend, as demonstrated by the following recent Canada Business Corporations Act (CBCA) and SEC amendments.

Effective for fiscal years ending on or after December 16, 2022, the SEC requires (https://www.sec.gov/rules/final/2022/34-95607.pdf) issuers to provide disclosure on pay versus performance. Specifically, issuers must provide a table disclosing specified executive compensation and financial performance measures for their five most recently completed fiscal years. While the rules do not apply to Canadian companies that report to the SEC under the Multijurisdictional Disclosure System (MJDS), emerging growth companies, registered investment companies, or foreign private issuers, Canadian companies may wish to align their disclosure with the new requirements.

The SEC’s final rules regarding the recovery of erroneously awarded incentive-based compensation became effective on January 27, 2023. The final rules require specific disclosure in an issuer’s annual report regarding an issuer’s clawback policy and recovery analysis where a recovery is triggered. The final rules apply to all U.S.-listed companies, including Canadian companies that report under the MJDS and foreign private issuers.

For CBCA-incorporated companies, amendments (https://laws-lois.justice.gc.ca/eng/acts/c-44/nifnev.html) with respect to say-on-pay, clawback and other employment disclosure are on the horizon but not yet in force. When in force, the CBCA amendments will require corporations to disclose the results of mandatory, but not binding, say-on-pay votes, information relating to the “recovery of incentive benefits or other benefits” previously paid to directors or members of senior management (i.e. clawback), and information respecting employee and retiree well-being.

(d)  Auditor Tenure Disclosure

An emerging trend is the increased focus from institutional investors on the length of auditor tenure, with Laurel Hill reporting a decline in support from 2020 to 2022 for auditors at TSX Composite Index companies based on length of tenure. While certain institutional investors may have fixed auditor tenure policies that guide their voting patterns, issuers with long-serving auditors may wish to revisit and supplement, as appropriate, their existing disclosure regarding strategies for maintaining and refreshing auditor independence to proactively address any concerns with the length of tenure.

2.  Virtual Considerations

(a)  Cybersecurity Disclosure

Cybersecurity continues to be a significant topic for all issuers, regardless of industry.  In its 2023 Policy Guidelines, Glass Lewis stated that cybersecurity is material for all companies and that investors benefit from clear disclosure regarding a Board’s oversight of cybersecurity risk.

With an aim to enhance and standardize cybersecurity disclosures, the SEC proposed new rules in March 2022 and requested comments by May 9, 2022. The proposed rules would require current reporting about material cybersecurity incidents, updates about previously reported incidents, and periodic disclosures regarding an issuer’s policies and procedures to identify and manage cybersecurity risks, management’s role in implementing cybersecurity policies and procedures, and the Board’s cybersecurity expertise, if any, and oversight of cybersecurity risk.  

(b)  Virtual Meetings

On February 25, 2022, the CSA published updated guidance on recommended disclosure for reporting issuers about shareholder access and participation at virtual meetings.

The CSA recommends that issuers provide clear and comprehensive disclosure concerning the logistics for accessing, participating and voting at a virtual shareholder meeting. Issuers can do this by providing full explanations regarding registration, authentication, voting and Q&A processes for both registered and beneficial shareholders. As well, issuers should include contact information for any shareholders experiencing difficulties during the registration process or while accessing and attending the virtual meeting.

3.  Disclosure Considerations During Economic Uncertainty

The CSA’s biennial review for the fiscal years ended March 31, 2022 and 2021 highlighted the need to carefully evaluate and explain how factors affecting and increasing economic uncertainty may impact issuers’ operating performance, financial position and future prospects. Factors identified include supply chain issues, the COVID-19 pandemic, labour shortages, high energy costs, inflationary pressures, rising interest rates, the global financial climate and the conflict in Ukraine and surrounding regions. Disclosures that may be impacted include known trends, events and uncertainties, liquidity and capital resources, debt covenants, risk factor disclosure, financial instrument risk disclosure, non-GAAP and other financial measures and material change reporting.

David Frost is a Partner at McCarthy Tétrault LLP. This article was written with co-authors Glynnis Morgan (Partner) and Micky Hoskin (Articling Student) at McCarthy Tétrault LLP.