On January 16, 2014, the Ontario Securities Commission (OSC) published for comment proposed amendments to National Instrument 58-101 Disclosure of Corporate Governance Practices (National Instrument 58-101) which, if adopted, will require most TSX-listed companies and other non-venture issuers reporting in Ontario to provide new annual disclosure about their director term limit policies and the representation of women on their board and in executive officer positions.
The OSC's goal is to encourage more effective boards and better corporate decision making by making gender diversity more transparent. They anticipate that this transparency will translate into an increased number of women on corporate boards and in the senior management ranks of Canadian public companies. While the OSC has not proposed imposing gender quotas, it is contemplating disclosure about targets (or the lack thereof) regarding women on boards and in executive officer positions.
In response to a request from the Ontario Government, the OSC staff released a consultation paper in July 2013 outlining a proposed framework for the disclosure of the representation of women on boards and in senior management of non-venture issuers (other than investment funds) (see our bulletin). The consultation paper garnered significant interest from the issuer, investor, corporate governance and advisor communities, with the OSC receiving 92 comment letters and holding various consultation meetings, including a public roundtable. The OSC tabled a report with the Ontario Government in December 2013 on the results of its consultation and recommendations arising from that process. The OSC has now released for comment proposed amendments to National Instrument 58-101 (which is a "comply or explain" disclosure regime) to add requirements regarding director term limit policies and board and senior management gender diversity.
Proposed Rule Changes
The OSC is proposing to make amendments to Form 58-101F1 of National Instrument 58-101, applicable to all TSX-listed and other non-venture issuers (other than investment funds) reporting in Ontario. These issuers would be required to make disclosure regarding gender diversity and director term limits as part of their annual summary of corporate governance practices (typically set out in the proxy circular). Specifically, the new disclosure contemplated includes the following:
- director term limits (a new development not included in the OSC's initial consultation paper);
- policies for the identification and nomination of women directors; if such a policy has been adopted, a summary of the policy and its objectives, measures taken to implement it and assess its effectiveness, and annual and cumulative progress on achieving the objectives of the policy;
- consideration of the representation of women in the director identification and selection process;
- consideration of the representation of women in the executive officer appointment process;
- targets regarding the number of directors and executive officers who are women; if such targets have been set, a summary of the annual and cumulative progress in achieving the targets (another new development since the consultation paper); and
- the number and proportion of directors and executive officers who are women.
Similar to the Canadian securities regulators' approach for other corporate governance issues, the OSC has proposed a "comply or explain" regime, requiring subject organizations to either describe their policies and practices in these areas or explain why they have not implemented these policies and practices, outlining the risks or opportunity costs associated with that decision.
Impact of the Proposed Changes
The OSC's initial consultation paper triggered significant input and broad discussion. Apart from the addition of disclosure of director term limit policies and targets, the proposed amendments track the approach outlined in the consultation paper. We anticipate that the proposed amendments will be adopted by the OSC largely in the form currently published—although the additional director term limit and target disclosures, and the phase-in of the proposed rules will attract debate that could lead to some changes.
We recommend that company boards and management consider their own gender diversity policies and practices in light of the OSC proposals. To date, most issuers have not adopted formal policies or targets of the nature contemplated by the OSC proposals—so their boards and management need to determine, based on their particular circumstances and governance objectives, whether to formalize their current approach to gender diversity or to develop new policies and practices that are responsive to the proposed framework. Issuers will also need to track and disclose new information, and will want to consider how to present gender diversity disclosure to stakeholders.
We note that U.S. domestic issuers already include diversity disclosure in their annual proxy statements. However, in contrast to the OSC's relatively prescriptive disclosure requirements, the U.S. regime requires disclosure of the role, if any, of diversity (not just in respect of gender) in the process for identifying director nominees (and not executive officers), allows companies to define diversity in ways they consider appropriate and leaves companies with significant discretion to determine what disclosure and diversity policy, if any, is appropriate.
While the OSC proposal is far reaching (covering all TSX-listed issuers other than investment funds), the rules are proposed as local amendments only to the National Instrument. It is not yet clear whether other Canadian securities regulators will adopt a similar approach. Recommendations are also expected from the Canadian federal advisory council, which was established in 2013 to promote women's participation on corporate boards, that may influence the initiatives in this area.
The OSC's comment period on the proposed amendments will close on April 16, 2014. In addition to comments on the proposed amendments, the OSC is looking for input on five specific questions related to the initiative and its rollout which are set out in its Request for Comment, a copy of which may be found on the OSC's website. We welcome the opportunity to discuss the OSC proposal and its impact on your organization's policies and practices with you.
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