Canada: Canada’s Corporate Governance Disclosure Rule Finalized

Last Updated: April 29 2005

Canadian securities regulators recently finalized their (a) policy setting out corporate governance guidelines that reflect best practices, and (b) disclosure rule requiring public companies to describe specific aspects of their governance practices. The disclosure rule will apply to financial years ending on and after June 30, 2005.

The governance guidelines are very similar in substance to the listing standards of the New York Stock Exchange and reflect current North American best practices in governance, which public companies will want to consider. These guidelines are not dramatically different from the 14 corporate governance guidelines adopted by the Toronto Stock Exchange in 1995. (Under "Governance Guidelines" below, we indicate changes from the TSX guidelines with "[new]".)

The governance guidelines are not mandatory. Public companies are simply encouraged to consider them when formulating their own governance practices, thus continuing the approach favoured by the TSX. And it is this feature—voluntary compliance coupled with a disclosure requirement—that distinguishes the Canadian approach from the mandatory listing standards adopted by the U.S. stock exchanges.1

It remains to be seen whether Industry Canada will continue pursuing proposed amendments to the Canada Business Corporations Act that would entrench many of the best practices in corporate governance in that statute.

Compliance with Disclosure Rule Is a TSX Listing Standard

If a TSX-listed company is required to comply with the new disclosure rule, such compliance is a continued listing requirement that replaces the TSX’s current corporate governance guidelines and disclosure requirement. The TSX will monitor corporate governance disclosure, and any listed company with deficient disclosure may be required to publish amended disclosure in its next quarterly report. Continuing non-compliance could result in suspension or delisting.

Securities Regulators Will Police Governance Disclosure

Disclosure will be required about each of the major aspects covered in the governance guidelines. Companies will be required to disclose more information about their directors (including their attendance records and the name of any other public company on whose board a director sits) and describe certain key elements of the company’s governance practices. Companies will be required to disclose whether they have adopted the recommended approach or, where their practices depart from that approach, to describe the procedures implemented to meet the same governance objective. (Companies listed on the TSX Venture Exchange and other companies with no securities listed or trading on a stock exchange are subject to less onerous disclosure requirements.) This emphasis on disclosure is intended to give public companies the flexibility to tailor governance practices to their own circumstances while giving investors sufficient information to assess those practices. Pressure by investors has been, and will likely continue to be, an effective catalyst for change in corporate governance practices.

Failure to provide adequate disclosure will be a breach of securities laws and could expose the issuer to enforcement proceedings and sanctions. The regulators have indicated that they will use their regular continuous disclosure reviews to ensure that the corporate governance disclosure portrays what is actually happening in the boardroom and is not merely boilerplate. Many public companies have made progress in rethinking their corporate governance disclosure. The disclosure rule will require most public companies to do this with renewed focus in the context of a specific form that details the disclosure to be made.

The governance guidelines and disclosure rule will apply not only to public companies but also to income funds, limited partnerships and other non-corporate issuers. Consequently, the regulators have attempted to clarify the application of the guidelines to these kinds of entities.

Investment funds, issuers of asset-backed securities, many foreign companies, credit support issuers and exchangeable share issuers are exempt from these disclosure requirements. In addition, a subsidiary of a public company (which is nonetheless a reporting issuer) will be exempt from the disclosure requirements if (a) the company has no equity securities (other than non-convertible, non-participating preferred securities) trading on a stock exchange; and (b) the parent company complies with these disclosure obligations or, where the parent has securities listed on a U.S. stock exchange, the parent complies with the corporate governance disclosure rules of that exchange.

Governance Guidelines

The regulators encourage public companies, including controlled companies, to follow the recommended practices described below. Given the number of concerns that have been raised about the application of these guidelines to controlled companies, the securities regulators intend to study the governance practices of controlled companies and consult with market participants over the next year. Changes may then be proposed to the guidelines and disclosure rule.

Board Composition

  • A majority of board members should be independent (see our client memo no. 2005-20, Independence of Directors Under Canadian Securities Law, April 21, 2005, which is available on our website, under Publications).
  • The board chair should be independent, or an independent "lead director" should be appointed.

Meetings of Independent Directors

  • The independent directors should hold regularly scheduled meetings that non-independent directors and management do not attend.

Board Mandate

  • The board should adopt a written mandate [new]. Under the disclosure rule, the text of any written mandate must be reproduced in the proxy circular or, if there is no written mandate, the company must describe how the board delineates its role and responsibilities. Most of the recommended responsibilities of the board are similar to those in the TSX guidelines—for example, (a) adopting a strategic planning process and approving a strategic plan at least annually; (b) ensuring the identification of the principal risks of the business; (c) succession planning; (d) adopting a communications policy; (e) overseeing internal control and management information systems; and (f) developing the approach to corporate governance. Companies may appoint a corporate governance committee (composed of a majority of independent directors, with the remaining members being non-management directors) to develop the company’s approach to governance; but having a corporate governance committee is not one of the guidelines, as it is under the NYSE’s listing standards.
  • The policy also recommends that the board be satisfied with the integrity of the CEO and other executive officers, and with the fact that these officers are creating a culture of integrity throughout the organization [new]. This particular recommendation is an important one and is not part of any U.S. rules.
  • The mandate of the board should also set out (a) the methods that stakeholders can use to provide feedback to the board (e.g., the board may want to establish a process to enable stakeholders to directly contact the independent directors)[new]; and (b) the expectations and responsibilities of directors, including those regarding the review of meeting materials before meetings and attendance at meetings [new].

Position Descriptions

  • The board should develop clear position descriptions for the chair of the board [new] and the chair of each board committee [new]. The board, together with the CEO, should develop a clear position description for the CEO that delineates management’s responsibilities. The board should also develop or approve the corporate goals and objectives that the CEO is responsible for meeting.

Orientation and Continuing Education

  • The board should ensure that all new directors receive a comprehensive orientation regarding both the business of the company and the duties of a director. Continuing education should also be provided to all directors [new].

Code of Business Conduct and Ethics

  • The board should adopt a written code of business conduct and ethics applicable to directors, officers and employees [new]. Under the disclosure rule, the code and any amendments must be filed on SEDAR, and the proxy circular must disclose how a copy of the code can be obtained [new]. The code should contain standards that are reasonably designed to promote integrity and deter wrongdoing, and should address (a) conflicts of interest (including transactions and agreements that a director or executive officer has a material interest in); (b) protection and proper use of corporate assets and opportunities; (c) confidentiality of corporate information; (d) fair dealing with securityholders, customers, suppliers, competitors and employees; (e) compliance with laws; and (f) reporting of illegal or unethical behaviour. The board should monitor compliance with the code, and any waivers sought by directors or executive officers should be approved only by the board or a board committee [new].
  • The guidelines state that the regulators will likely take the view that a material change has occurred where a director’s or executive officer’s conduct materially departs from the code. They do, however, confirm that the company must exercise its own judgment in making the materiality determination. If the conduct is considered a material change, a news release must be issued and a material change report filed.

Nomination of Directors

  • The board should appoint a nominating committee that is composed entirely of independent directors [new]. The responsibilities, powers and operation of the nominating committee, if one exists, must be described in the proxy circular.
  • The nominating committee should adopt a written charter [new]. The committee should, among other things, (a) engage in a specified process to determine what competencies and skills should be sought in new board members [new]; and (b) identify individuals who possess those skills and have sufficient time and resources to devote to the task. The committee should also be authorized to engage and compensate an outside adviser.


  • The board should appoint a compensation committee that is composed entirely of independent directors [new]. The responsibilities, powers and operation of the compensation committee, if one exists, must be described in the proxy circular.
  • The compensation committee should adopt a written charter [new]. The committee should be responsible for (a) determining the CEO’s compensation or making a recommendation to the board in this respect (after having evaluated the CEO’s performance in meeting the corporate goals and objectives relevant to compensation that the committee has set for the CEO); (b) making recommendations to the board regarding the compensation of other officers [new] and directors; (c) making recommendations to the board regarding incentive-compensation plans and equity-based plans [new]; and (d) reviewing the executive compensation disclosure in the proxy circular and in offering documents before their public release [new]. The committee should also be authorized to engage and compensate an outside adviser. If a compensation consultant or adviser is retained to assist in determining the compensation of any of the company’s directors or officers, the identity of the consultant or adviser must be disclosed together with a summary of the nature of the work to be performed [new].

Regular Board Assessments

  • The board should regularly assess its own effectiveness, and the effectiveness and contribution of each board committee and individual director.

The implementation of some of the guidelines may well be shaped by the desire to maintain confidentiality and in some cases to establish legal privilege.

National Instrument 58-101, Disclosure of Corporate Governance Practices, and National Policy 58-201, Corporate Governance Guidelines, can be found on the Ontario Securities Commission’s website at


1. Foreign private issuers in the United States are permitted to adopt a “comply or explain” regime, but U.S. domestic companies must comply with the NYSE’s and Nasdaq Stock Market’s corporate governance listing standards.

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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