By Bill Gilliland, Jessica Myers
Trends and Developments
Corporate governance in Canada continues to evolve. Changes continue to be made to corporate statutes to remove perceived technical burdens. The adoption of majority voting in the Canada Business Corporations Act (CBCA) strengthens shareholders’ hands at shareholders meetings. Diversity continues to be a focus of regulatory and proxy advisory policy change, and for boards is a key component of ESG concerns. The diversity focus remains on gender but is moving to include Indigenous peoples, persons with disabilities and members of visible minorities.
Climate change is another core aspect of ESG concerns at the board level. Proposed climate-related disclosure rules will entail very significant changes to corporate governance that will require boards of directors to undertake a comprehensive review of the corporation’s governance structures and practices. In late 2021 an influential report was released listing guidelines and outlining a framework for boards of Canadian corporations to follow in addressing stakeholder interests more broadly than just shareholder interests.
Written Resolutions of Shareholders
Corporate statutes in Canada have long contemplated that shareholders can sign written resolutions in lieu of holding a shareholder meeting. Typically, these resolutions need to be signed by all shareholders to be valid, and so have been a helpful tool for closely held corporations. In July 2021, the Business Corporations Act (Ontario) was amended to make written resolutions passed by holders of a majority of shares of privately held corporations valid as if passed at a shareholder meeting. This will facilitate the use of written resolutions by more widely held private (non-public) corporations.
In November 2021, the Supreme Court of British Columbia in Rogers v Rogers Communications Inc upheld the validity of a written consent resolution signed by holders of approximately 97.5% of the voting shares of Rogers Communications Inc to change the board of directors of Rogers. The court relied on unique provisions of the Business Corporations Act (British Columbia) (BCBCA) as well as the articles of Rogers to find a resolution signed by holders of less than all shares to be effective. Due to the unique language of the BCBCA this decision likely has little direct application outside of British Columbia. The decision has led regulators and shareholders to further consider the appropriateness of dual-class share structures (voting and non-voting common shares).
Canadian Director Residency Requirements
Canadian corporate statutes have required that a certain percentage (typically 25%) of the directors of a corporation be Canadian residents. “Canadian resident” has been defined to include Canadian citizens and permanent residents, in each case, who are ordinarily resident in Canada. Jurisdictions in Canada are starting to remove this requirement.
When British Columbia introduced its new BCBCA in 2002, it did not include a Canadian resident director requirement. The Yukon’s corporate statute also did not have that requirement. Foreign investors in Canada started to incorporate under these statutes to avoid having to find Canadian resident directors, and as a result other jurisdictions undertook reviews of their requirements.
In March 2021, the Business Corporations Act (Alberta) was amended to remove the Canadian resident director requirement. In its place, corporations must designate a resident Albertan as their agent for service. In July 2021, the Business Corporations Act (Ontario) was amended to remove the Canadian resident director requirement. Ontario corporations must still file residency information in their regular filings with the Ontario corporate registry.
Majority Voting for Directors of Public Corporations – Voting For or Against
Canadian corporate statutes have required that shareholders either vote for or withhold their vote on the election of directors at annual meetings. This has meant that if a director receives just one vote for their election at an uncontested shareholder meeting, then that director will be elected, even if a vast majority of shares are withheld from voting for that director.
Starting in 2014, all corporations listed on the Toronto Stock Exchange (TSX) were required to adopt a majority voting policy pursuant to which each director must be elected by a majority of votes cast with respect to their election, except at a contested meeting. Majority voting policies must also require:
- a director to immediately tender their resignation if they are not elected by at least a majority (50% +1 vote) of the votes cast with respect to their election;
- the board to determine whether to accept the resignation within 90 days of the shareholder meeting, and the resignation should be accepted in the absence of exceptional circumstances;
- the resignation to become effective when accepted by the board;
- a director who tenders a resignation not to participate in board or committee meetings at which the resignation is considered; and
- the issuer to promptly issue a news release with the board’s decision including, in the case of a board not accepting the resignation, the reasoning behind such a decision.
Amendments to the CBCA and its regulations now require that, for shareholder meetings held after 31 August 2022, CBCA-incorporated public corporations must allow shareholders to vote “for” or “against” individual director nominees in an uncontested election, rather than “for” or “withhold”. Where only one nominee is up for election for each board seat and less than 50% of the votes cast by shareholders are “for” a particular director nominee, such a nominee will not be elected as a director (subject to provisions in the issuer’s articles). However, if an incumbent director is not elected by a majority of “for” votes at the meeting, they will still be permitted to remain as a director until the earlier of: (a) the 90th day after the day of the election; or (b) the day on which their successor is appointed or elected.
The elected directors may reappoint the incumbent director even if they do not receive majority support in the most recent election in certain limited circumstances:
- where it is required to satisfy the CBCA’s Canadian residency requirement; or
- where it is required to satisfy the CBCA’s requirement that at least two directors of a distributing corporation are not also officers or employees of the corporation or its affiliates.
Diversity – Boards and Senior Management
Diversity on boards and in senior management is being reviewed by corporate regulators and stakeholders and the legal and “soft-law” requirements have and are continuing to evolve. Since 2014 TSX-listed corporations have been required to make diversity-related disclosure in their annual disclosure documents on a “comply or explain” basis, including:
- on their policies and targets regarding the representation of women on the board of directors and in executive positions;
- how representation of women is taken into account in selecting board and executive officer candidates;
- gender representation on the board and in executive officer positions; and
- term limits.
See National Instrument 58-101 of the Canadian Securities Administrators (CSA) Disclosure of Corporate Governance Practices (NI 58-101).
Public corporations governed by the CBCA have been required to make diversity-related disclosure regarding women, Indigenous peoples, persons with disabilities and members of visible minorities (designated groups) since 2020 (CBCA Section 172.1) on a “comply or explain” basis. These requirements include disclosure of term limits or other board renewal mechanisms, a description of written diversity policies for the selection of individuals from the designated groups as board nominees and a description of progress made in achieving the policy’s objectives, whether the level of representation of designated groups on the board or in senior management is considered in appointing new candidates, whether targets have been established for representation of the designated groups on the board and in senior management as well as progress towards those targets, and the number of members of each of the designated groups on the board and in senior management. New guidelines for making this disclosure were published by Corporations Canada in February 2022.
Increasingly, governance ratings organisations and industry groups developing “best practices” are focusing on gender and other diversity measures as critical elements of measuring/rating corporate governance. See, for example, the Canadian Coalition for Good Governance and The Globe and Mail Board Games.
Proxy advisory firms are following suit, with both Glass Lewis and Institutional Shareholder Services (ISS) adopting gender diversity policies in respect of Canadian public corporations (regardless of jurisdiction of incorporation).
Beginning in 2022, ISS and Glass Lewis will apply gender diversity policies for boards of Canadian corporations.
For boards of TSX-listed corporations, Glass Lewis will generally recommend voting against (1) the chair of the nominating committee of a board with fewer than two gender diverse directors, or (2) the entire nominating committee of a board with no gender diverse directors. The term “gender diverse directors” is an expansion from Glass Lewis’ concept of gender diversity to include not only women, but also directors that identify with a gender other than male or female.
For companies not listed on the TSX, and for all boards with six or less directors, a minimum of one gender diverse director is required. Glass Lewis may refrain from recommending that shareholders vote against directors of companies when boards have provided a sufficient rationale or plan to address the lack of diversity on the board.
ISS will recommend voting “withhold” for the chair of the nominating committee (or chair of the board, if no nominating committee has been identified or no chair of such a committee has been identified) for all TSX-listed issuers where the issuer:
- does not have a formal written gender diversity policy; and
- has no women on its board of directors.
For TSX-listed issuers that form part of the S&P/TSX Composite Index (“S&P/TSX-listed issuers”), ISS has imposed a higher standard and will recommend voting “withhold” for the chair of a nominating committee (or chair of the board if no nominating committee has been identified or no chair of such a committee has been identified) where:
- women comprise less than 30% of the board; and
- the issuer has not provided a clear commitment to achieve this target prior to the next annual general meeting (AGM).
Exemptions will continue to be available for newly listed TSX-listed issuers and those transitioning from the TSX Venture Exchange within the prior or current fiscal year.
Starting on 1 January 2023, Glass Lewis will implement a percentage-based approach instead of a numerical requirement and will generally recommend voting against the nominating committee chair of a board of a TSX-listed company that is not at least 30% gender diverse. ISS will have a 30% requirement in 2022, but only for S&P/TSX-listed issuers, and will generally not recommend a negative vote, provided that the company has a formal written gender diversity policy as contemplated by NI 58-101 and includes a commitment to include at least 30% of women on the board by the next AGM.
Through 2021, a series of reports and reviews were prepared by the Ontario Securities Commission, the CSA and Corporations Canada focusing on board and senior management diversity data, term limits and targets, and looking at diversity based on gender, visible minorities, persons with disabilities and Indigenous peoples, to provide the basis for consultation towards further regulatory changes. The CSA continue to consider whether the diversity disclosure model should move from “comply or explain” to mandatory quotas in order to accelerate increased diversity. Further proposals to change the current diversity disclosure framework will be coming.
Preparing for Mandatory Climate-Related Disclosure – Governance Changes for Public Corporations
On 18 October 2021, the CSA published a proposed National Instrument 51-107 Disclosure of Climate-related Matters and its proposed Companion Policy 51-107CP (the “Climate Disclosure Proposals”) for comment. For TSX-listed corporations with 31 December year-ends, the proposed rules would take effect for annual filings made in early 2024.
The Climate Disclosure Proposals would require disclosure based on recommendations of the Task Force on Climate Related Financial Disclosures (TCFD). The Climate Disclosure Proposals would require issuers to make disclosure in the following areas:
- governance – describing the board’s oversight of climate-related risks and opportunities, and management’s role in assessing and managing climate-related risks and opportunities;
- strategy – describing any climate-related risks and opportunities identified over the short, medium and long term and describing the impact of these risks and opportunities on its business, strategy and financial planning;
- risk management – describing its processes for identifying, assessing and managing climate-related risks and how these processes are integrated into overall risk management;
- metrics and targets – describing its metrics used to assess climate-related risks and opportunities and targets used to manage these risks and opportunities.
The TCFD contemplates that issuers should disclose greenhouse gas emissions (Scope 1, 2 and 3). The Climate Disclosure Proposals would require issuers to make this disclosure or explain why they do not. The Climate Disclosure Proposals would not require issuers to disclose the resilience of their strategy with reference to various climate scenarios, a key element of the TCFD recommendations.
In preparing to comply with the new requirements, corporations and boards should be taking the following steps.
- Boards of directors should expressly establish oversight of climate-related risks and opportunities of the issuer. This will require reviewing, and where necessary amending, board charters and mandates and board skills and competencies matrices, and then reviewing whether any changes need to be made in board composition to ensure the board has the necessary climate competencies to effectively provide this oversight.
- Boards of directors should expressly task management with responsibility for assessing and managing climate-related risks and opportunities. This will involve the review and revision of role descriptions and mandates. As climate-related disclosure is added to an issuer’s management information circular, annual information form (AIF) or management’s discussion and analysis (MD&A), the annual and interim CEO/CFO certifications (National Instrument 52-109 Certification of Disclosure in an Issuer’s Annual and Interim Filings) will apply to that climate-related disclosure. Management will need to have designed disclosure controls and procedures to provide reasonable assurance that climate-related material information will be made known to the CEO and CFO, and that required disclosure on climate-related matters is made. Boards of directors will need to be comfortable that these controls and procedures are in place and have oversight over their effectiveness.
- Boards of directors should consider board committee roles in the review and assessment of climate-related risks. Boards of directors should consider the mandates of any board committees that have delegated responsibilities around risk review and assessments, and carefully consider where the assessment of climate risks should fit within those board committees, if at all.
- Boards of directors should specifically consider the role of the audit committee in the review and assessment of climate-related risks and opportunities. At a minimum, the audit committee will need to ensure that once those risks and opportunities are assessed, their implications are properly reflected in the issuer’s financial reporting including in assumptions, uncertainties and estimates made in the preparation of financial statements.
- Boards of directors should be aware that the Climate Disclosure Proposals require climate-related disclosure to be contained in documents that by law must specifically be reviewed and approved by the board (namely, the corporation’s AIF, management proxy circular and, in some cases, the MD&A). Climate-related disclosure is often made in standalone sustainability or other reports.
- Boards of directors will need to assess the materiality of climate-related risks and opportunities. The Climate Disclosure Proposals require an issuer to disclose (i) climate-related risks and opportunities (short, medium and long-term) and their impact on the issuer’s businesses, strategy and financial planning (Strategy); (ii) the issuer’s processes for identifying, assessing and managing climate-related risks (Risk Management); and (iii) metrics and targets used by an issuer to assess and manage climate-related risks and opportunities (Metrics and Targets) only where the information is “material” – ie, where a reasonable investor’s decision to buy, sell or hold securities is likely to be influenced if the information is omitted or misstated.
- Boards of directors should develop a familiarity with the TCFD recommendations. The Climate Disclosure Proposals do not specifically incorporate the TCFD recommendations. However, the disclosure under the Climate Disclosure Proposals is intended to be consistent with the TCFD recommendations on the stated areas of disclosure, and issuers are encouraged to refer to those recommendations in preparing the required disclosure under the Climate Disclosure Proposals.
- Boards of directors should consider the need for scenario analysis as contemplated within the TCFD recommendations. Boards of directors should consider whether in order to properly identify climate-related risks and opportunities, and their impact on an issuer’s business, management needs to undertake some scenario analysis as contemplated within the TCFD recommendations notwithstanding that the Climate Disclosure Proposals do not require disclosure in respect of those scenarios. In turn, boards would need to review that analysis. The use of scenario analysis as a tool to assess risks and opportunities is generally understood to offer benefits in situations where the precise timing and magnitude of risks are uncertain, the analysis needs to be forward-looking, and risks (and opportunities) can be high impact where historical experience is not necessarily a guide to the likelihood of their future occurrence.
- Boards of directors will need to consider the annual timing of preparation of an issuer’s climate-related disclosure. Currently, many issuers are reporting this type of information in standalone sustainability reports and/or other documents released throughout the year on different schedules from the typical annual disclosure cycle.
- Boards of directors should consider any de facto requirement to disclose GHG emissions. Boards of directors should consider whether there will develop (or maybe already has developed in some cases) a de facto requirement to disclose GHG emissions in their disclosure documents, notwithstanding that the Climate Disclosure Proposals adopt a “comply or explain” model allowing issuers to omit that disclosure if they explain why. Access to the various sustainable finance tools or funding from some institutional investors may already require that an issuer discloses its GHG emissions. As issuers are entering into sustainability-linked financings based on GHG emissions, they will be reporting their GHG emissions to banks and bond holders. Canada’s largest banks (and other Canadian and international financial institutions) are now members of the Net-Zero Banking Alliance. Members of the Net-Zero Banking Alliance have committed to transition the GHG emissions attributable to their lending and investment portfolios to align with pathways to net zero by 2050, and to set interim targets for at least 2030 and every five years onwards to 2050. To satisfy these requirements, it seems likely issuers will face more general requirements to provide this GHG emissions disclosure to their banks. Many issuers are already providing GHG emissions information in investor presentations or in separate sustainability reports. Where investors and other stakeholders are asking for this data, it becomes harder to argue the information is not “material”.
- Boards of directors should consider whether the issuer should start early in addressing the disclosure contemplated by the Climate Disclosure Proposals.
- Boards of directors will need to monitor the development of climate disclosure ratings and rankings established by third parties. As has occurred in respect of general governance disclosure (see, for example, the Canadian Coalition for Good Governance and The Globe and Mail Board Games), benchmarking of issuers’ climate-related disclosure has started. See, for example, the Climate Action 100+ corporate benchmarking which looks at corporate disclosures around climate-related governance, reduction of GHG emissions and public disclosure following the TCFD recommendation. These rankings (and their score cards) are likely to become a consideration in the preparation of issuers’ public disclosure documents.
360° Governance Report – Framework for Stakeholder Analysis
Supreme Court of Canada decisions (Peoples Department Stores Inc (Trustee of) v Wise; and BCE Inc v 1976 Debenture Holders) have affirmed that in Canada the board has the duty to act in the best interests of the corporation and does not have the legal duty to act in the best interests of any particular stakeholder group (shareholders). These decisions have underlined a legal shift from shareholder primacy to stakeholder primacy.
A report entitled 360° Governance: Where are the Directors in a World in Crisis? by Peter Dey and Sarah Kaplan was released in 2021 proposing a set of 13 guidelines aimed at providing clarity about how boards can effectively consider the interests of all stakeholders (including shareholders) and the rights of Indigenous peoples in their decision-making. The report notes that addressing impacts on stakeholders must be central to corporate governance because stakeholders create enterprise risks as well as strategic opportunities for innovation, growth and transformation.
The guidelines include articulating a corporate purpose, identifying stakeholders, fostering relationships with Indigenous peoples, reporting on stakeholder impact, establishing mechanisms to engage with stakeholders, ensuring regular board renewal with appropriate competencies, ensuring appropriate board and organisational diversity, establishing policies for addressing climate change and climate-related risks and opportunities, and engaging in thoughtful corporate activism.
The guidelines are based on extensive research and consultations on the issues that boards are facing and the best practices for dealing with them, and it is widely anticipated that the guidelines will serve as a foundational reference for future market, regulatory and legislative developments in corporate governance in Canada.