Securities regulators in Ontario, Quebec and a number of other jurisdictions (excluding Alberta and British Columbia) have adopted new disclosure requirements for Canadian issuers relating to (i) gender diversity on boards of directors and in executive officer positions and (ii) board renewal mechanisms, such as director term limits.1 The new rules are meant to increase transparency for investors and other stakeholders about these matters but importantly do not mandate the adoption of formal diversity policies or targets. The rules will be effective as of December 31, 2014, in time for the 2015 proxy season for Canadian issuers with calendar year ends. Venture issuers are excepted.
The new requirements in respect of gender diversity and board renewal mechanisms are consistent with Canada's existing "comply or explain" model of corporate governance, and the disclosure will be required as part of the annual summary of corporate governance practices under National Instrument 58-101 (typically set out in the proxy circular).
Background to the Rules and the Federal Initiative
In developing the new requirements, the Ontario Securities Commission, which led the rule-making initiative, issued a consultation paper for public comment, held a public roundtable, conducted a survey of approximately 1,000 TSX-listed issuers, and reviewed approaches to gender diversity in Australia, the European Union, the United Kingdom and the United States. This represents a significant amount of public outreach and opportunity for input from market participants and others.
At the federal level, in June 2014, the federal Advisory Council for Promoting Women on Boards published a report Good for Business: A Plan to Promote More Women on Canadian Boards. The key recommendation of this report is that the Government of Canada aspire to 30% female representation on boards over the next five years. To promote that objective, Minister Kellie Leitch is proactively reaching out to Canada's largest companies individually to strongly encourage gender diversity on boards. The report also endorses the proposed "comply or explain" approach to gender diversity on boards that is now being implemented by the new rules described in this bulletin.
Changes from the Proposed Rules
The participating regulators received a substantial number of comment letters on the proposed rules, and the final rules incorporate the following modifications in response to those comments:
- The board renewal disclosure requirements have been modified so
as to focus not just on director term limits but on other
mechanisms issuers may use to achieve board renewal, as discussed
- The final rules clarify that gender diversity policies are
defined as written policies, not informal, unwritten
- If an issuer has adopted gender diversity targets, those
targets must be disclosed.
- When disclosing how many women hold executive officer positions, the issuer must take into account its major subsidiaries, not all of its subsidiaries.
Gender Diversity Disclosure Requirements
The new rules will require the following of Canadian, non-venture issuers:
- Issuers must disclose whether they have adopted a written
policy relating to the identification and nomination of women
directors. Issuers without a written policy must disclose why they
have not adopted one, while issuers with a written policy must
(i) a short summary of the policy's objectives and key provisions,
(ii) the measures taken to ensure effective implementation,
(iii) annual and cumulative progress in achieving the policy's objectives, and
(iv) whether and, if so, how the board measures the policy's effectiveness.
- Issuers must disclose whether and, if so, how the board
considers the representation of women in identifying and nominating
board candidates. If an issuer does not consider the representation
of women in this context, it must disclose why not.
- Issuers must disclose whether and, if so, how they consider the
representation of women when making executive officer appointments.
If an issuer does not consider the representation of women in this
context, it must disclose why not.
- Issuers must disclose whether they have adopted targets for
women on the board of directors and/or in executive officer
positions. If an issuer has not adopted targets, it must disclose
- Issuers that have adopted targets for women on the board or in
executive officer positions must disclose those targets and the
issuer's annual and cumulative progress in achieving
- Issuers must disclose the number and percentage of their directors who are women and the number and percentage of their executive officers (including at major subsidiaries) who are women.
Board Renewal Disclosure Requirements
Issuers will have to disclose whether or not they have adopted term limits or other mechanisms for board renewal and, if so, those mechanisms must be described. Issuers that have not adopted term limits or other board renewal mechanisms will have to disclose why not. These requirements differ from the original proposed rules in that the proposals focused primarily on term limits. Based on comments from market participants, the participating regulators modified the disclosure requirements, acknowledging that term limits are not the exclusive method by which issuers may strive for effective board renewal. Other methods include board and committee evaluation processes, skills identification and needs assessment, and director retirement policies.
Preparing for the 2015 Proxy Season
In preparation for the 2015 proxy season, boards of directors and management should consider their gender diversity and board renewal policies and practices in light of the new disclosure requirements. We note that to date, only a small minority of Canadian issuers have adopted formal gender diversity or board renewal policies or targets. A subset of that minority has adopted the Catalyst Accord, under which participating companies set the objective of 25% female representation on the board of directors by 2017. The majority of Canadian companies will need to determine, based on their particular circumstances and governance objectives, whether to develop a policy, adopt new practices or maintain the status quo for the time being, keeping in mind the related disclosure that will be required. Nominating Committees may wish to set aside extra time on their agendas to address these matters soon.
Notably, a number of market participants commented that the concept of diversity should encompass not just gender but other aspects of diversity too, such as race, nationality, ethnicity, cultural background, aboriginal status, age and disability. In response to these comments, the participating regulators noted that although not required at this time, issuers are welcome to voluntarily provide information about their approach to diversity more generally. Issuers may wish to consider addressing this in their disclosure.
The new Canadian disclosure requirements are quite different from the SEC's rules. In contrast to the relatively prescriptive "comply or explain" Canadian model, the U.S. regime permits companies to define diversity as they see fit, which leaves them with significant discretion as to the scope of their disclosure. Perhaps due to the open-ended nature of the SEC's rules, SEC Chair Mary Jo White stated in a recent speech that the quality of U.S. companies' diversity disclosure has been disappointing. The participating Canadian regulators have indicated that they plan to assess the effectiveness of the new Canadian rules by conducting a compliance review after three annual reporting periods.
To review the full text of the gender diversity and board renewal disclosure rules, see Multilateral CSA Notice of Amendments to National Instrument 58-101 - Disclosure of Corporate Governance Practices.
We encourage you to contact us if you would like to discuss the new disclosure requirements and their impact on your organization's policies and practices.
1 The new requirements will not apply to companies that are reporting issuers exclusively in non-participating jurisdictions, which are currently Alberta, British Columbia, Prince Edward Island, and the Yukon.
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.