Previously published in Lexpert Magazine in June
While regulators in the US attempt to carve a definition of
director independence into stone, authorities in Canada seem to be
taking a more considered approach — one that will
ultimately lead to better governance.
The movement to regulate corporate governance continues to pick
up pace. After an initial focus on audit committees, the more
recent target has been compensation committees, responsible for
managing the executive compensation process.
In the United States, the Securities and Exchange Commission
(SEC) has proposed new rules, pursuant to Dodds-Frank. These rules
require US stock exchanges to introduce new requirements for
US-listed companies (except foreign issuers, including most
US-listed Canadian companies). While US exchanges already require
independence in compensation committees, the new rules would focus
on the specificity of the definition, and require that exchanges
define independence for this purpose. They would require
compensation committees to have authority to retain and pay
advisors, to consider the independence of the advisors, and to make
disclosure about issues identified.
In Canada, compensationcommittee independence (in the sense of
absence of material interests, as determined by the board) is
already recommended by the Canadian Securities Administrators
(CSA), and disclosure of independence determinations is required.
Advisor conflicts must also be addressed, and related disclosure is
It is stunning, but not surprising, that the SEC proposals
proceed as they do. Once again, independence is perceived as the
single assuring quality, and there is a focus on objectifying the
basis on which independence is to be measured. The simplistic sense
here is that a suitably independent director will be a good
While independence may represent an apparently objective
criterion, even early advocates have recognized its limitations and
have recommended greater sophistication. In the current context,
compensation-committee proposals made by the CSA represent a
considerable advance over what the SEC has recommended.
Under the CSA's proposal, companies would have to describe:
(a) whether committee members have direct experience relevant to
their responsibilities in executive compensation; (b) the skills
and experience that enable the committee to make decisions on the
suitability of the company's compensation policies and
practices consistent with a reasonable assessment of the
company's risk profile; and (c) the responsibilities, powers
and operation of the committee.
Moreover, the Canadian regimen would have independence
determined by the board (on the basis that the director has no
conflicting material relationship with the company). In short, the
CSA's proposed policy would promote independence, but also the
appointment of qualified committee members.
Institutional investor advisory groups have rarely suggested
criteria of this sort, because they are not "objective."
However, a check-thebox mentality is not at all suited to the
subtlety of corporate governance. After all, "compensation
literacy" is hardly less concrete a concept than
"financial literacy," which applies to audit-committee
It's unfortunate that so many glaring examples of inadequate
corporate governance have forced legislators and regulators to step
in to tell directors how to do their jobs. This, coupled with a
so-called shareholder democracy movement, has led not only to a
variety of specific requirements, but also to current or proposed
reforms in areas of say on pay, golden parachutes in connection
with changes of control, slate versus individual director majority
voting and the proxy voting system.
By contrast, the European Commission recently issued a
consultation paper on corporate governance. Eschewing intense
specificity, the discussion focused on suitability of the board to
the company's business, accurate assessment of a directors
skills and experience, gender diversity, the willingness and
ability of directors to devote sufficient time to their duties, and
annual board evaluation.
Unintended consequences of the SEC's more specific approach
include a form-over-substance mentality and the ceding of power to
sometimes tyrannical shareholder groups. New governance rules give
activists more tools with which to pressure companies to business
strategies advocated by the activists.
While governance reform and regulation may be necessary,
it's important to ensure that the result will be what's
intended. The CSA has the better approach here.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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