Canada: Canadian Securities Regulators Propose Amendments To Corporate Governance Regime


The Canadian Securities Administrators (CSA) have published proposals to amend the corporate governance regime applicable to Canadian public issuers. A Request for Comment was issued by the CSA on December 19, 2008 in respect of proposed National Policy 58-201 – Corporate Governance Principles (NP 58-201), National Instrument 58-101 – Disclosure of Corporate Governance Practices (NI 58-101), National Instrument 52-110 – Audit Committees (NI 52-110) and Companion Policy 52- 110CP – Audit Committees (CP 52-110) (the proposals). The proposals, if enacted, would repeal and replace existing NP 58-201, NI 58-101, NI 52-110 and CP 52-110 (the current regime). The publication of the proposals reflects the undertaking by the CSA in 2005, when the current regime was introduced, to periodically review the governance regime to ensure its continued appropriateness. Comments on the proposals must be received by April 20, 2009.

In response to criticism that the current regime is too prescriptive and could be interpreted as setting minimum standards that may not be appropriate for all issuers, the proposals adopt a principles-based approach to corporate governance and disclosure. In particular, they contemplate:

  • replacing the specific existing governance guidelines with nine broad governance principles, accompanied by explanatory commentary and examples of governance practices that could meet the objectives of such principles;
  • requiring disclosure which is more general in nature, as opposed to the current "comply or explain" regime; and
  • replacing the current prescriptive tests of independence for directors and audit committee members with a principles-based test and accompanying commentary.

Despite the proposed additional flexibility in the Canadian governance regime, it must be noted that Canadian issuers listed on a U.S. stock exchange will still have to comply with applicable requirements prescribed by the U.S. Sarbanes–Oxley Act of 2002 and the Securities and Exchange Commission.

Governance Principles And Disclosure

The current regime sets out non-mandatory guidelines relating, among other things, to board independence, the role of the board and management, directors' education, board assessment, selection of directors and the compensation of senior officers. Issuers are generally required to disclose, in their management information circular (or annual information form or MD&A in certain circumstances), whether or not they have adopted a particular guideline as their governance practice and, if not, to describe how the objective of the guideline has been met. Venture issuers are subject to reduced disclosure. As a result of the "comply or explain" disclosure, there has been criticism that the regime is essentially a prescriptive set of governance guidelines, despite the fact that they are stated to be non-mandatory.

The proposals replace the current regime with general guidelines based on nine core principles, as well as a requirement to disclose what the issuer does with respect to those nine principles. The new guidelines describe the following core corporate governance principles:

  • Create a framework for oversight and accountability: An issuer should establish the respective roles and responsibilities of the board and executive officers.
  • Structure the board to add value: The board should be comprised of directors who will contribute to its effectiveness.
  • Attract and retain effective directors: A board should have processes to examine its membership to ensure that directors, individually and collectively, have the necessary competencies and other attributes.
  • Continuously strive to improve the board's performance: A board should have processes to improve its performance and that of its committees, if any, and of individual directors.
  • Promote integrity: An issuer should actively promote ethical and responsible behaviour and decision-making.
  • Recognize and manage conflicts of interest: An issuer should establish a sound system of oversight and management of actual and potential conflicts of interest.
  • Recognize and manage risk: An issuer should establish a sound framework of risk oversight and management.
  • Compensate appropriately: An issuer should ensure that compensation policies align with the best interests of the issuer.
  • Engage effectively with shareholders: The board should endeavour to stay informed of shareholders' views through the shareholder meeting process as well as through ongoing dialogue.

Each governance principle is accompanied by commentary describing the objective of the principle and examples of practices which may accomplish such objectives. While the examples are said not to create obligatory practices or minimum standards, many are drawn from the current guidelines. For instance, one practice cited as meeting the principle of the general principle "Structure the board to add value" is having a majority of directors who are independent. Such practice is a guideline in the current regime. Other instances of guidelines that are now described as examples include, among other things, adopting a written mandate for the board, developing clear position descriptions for directors, committee chairs and the CEO, performing board assessment, appointing an independent chair, establishing committees, undertaking board education and adopting a code of conduct.

Emphasizing their flexible application, the proposals specifically recognize that (i) other governance practices could achieve the same objectives, (ii) corporate governance evolves as an issuer's circumstances change, and (iii) issuers should determine their own practices.

The proposals require each issuer to explain and disclose the governance practices used to meet the objectives of each principle. In addition, issuers will be required to make certain factual disclosure to assist investors in understanding their governance practices. Such disclosure includes identifying each director as either "independent" or "non-independent" (see "The Independence Test" below).

As the disclosure requirements do not use a "comply or explain" model, it is proposed that debt-only and venture issuers will make the same disclosure as other reporting issuers.

The Independence Test

The current regime requires issuers, other than venture issuers, to have an audit committee consisting of at least three members, all of whom are independent from the issuer. The proposals maintain this requirement. Currently a director or nominee will be considered independent (for the purposes of both the audit committee and the board generally) if he or she has no direct or indirect "material relationship" with the issuer. A material relationship is defined to be:

a relationship, which could, in the view of the issuer's board of directors, be reasonably expected
to interfere with the exercise of a member's independent judgment.

Certain relationships are deemed to preclude independence thereby removing the determination of independence from the board of directors. These include certain employment, partnership or compensatory relationships or arrangements that a director or, in some instances, a family member of the director has or may have had with the issuer, a subsidiary, or its internal or external auditor.

The proposals amend the definition of independence to a more principles-based definition. A director would be independent if he or she:

  1. is not an employee or executive officer of the issuer; and
  2. does not have, or has not had, any relationship with the issuer, or an executive officer of the issuer, which could, in the view of the issuer's board of directors having regard to all relevant circumstances, be reasonably perceived to interfere with the exercise of his or her independent judgment.

In an effort to be less prescriptive, the provisions deeming certain relationships to preclude independence (other than employees and executive officers of the issuer) have been removed. The removal of these "bright-line" tests is intended to allow directors to exercise their reasonable judgment in determining independence. While the "bright-line" tests have been removed, the commentary which is provided in the accompanying companion policy contains a non-exhaustive list of relationships that might affect a director's independence. The policy states that the board should apply, in its analysis of business and other relationships, materiality thresholds that are appropriate for the issuer and the directors.

The new definition also refers to relationships that are "reasonably perceived" to interfere with the exercise of independent judgment as opposed to "reasonably expected" which is included in the current test. The CSA have indicated that the concept of "reasonably perceived" is broader than the current test of "reasonably expected" and is appropriate because of the removal of the "bright-line" tests.

Under the proposals, the control person or a significant shareholder of an issuer is not automatically precluded from being independent. Boards will need to consider whether the control person's or significant shareholder's relationship with management could be perceived to interfere with the exercise of independent judgment by such person.

Finally, the issuer will be required to disclose, for each director, if the board considers that he or she is independent. The basis of the board's determination must also be disclosed. If a director has been determined to be independent, the issuer must describe any relationship which was considered by the board of directors in the course of determining his or her status.

Alberta Securities Commission

As part of the Request for Comment, the Alberta Securities Commission (ASC) has expressed certain concerns regarding the proposals. These concerns relate, among other things, to the determination of independence and the disclosure related thereto.


The proposals of the CSA have been presented as a change in philosophy in order to provide more flexibility to Canadian issuers. Ogilvy Renault will provide comments to the CSA on many aspects of the proposals, but salutes the significant effort made by the CSA to respond to the concerns of market participants. It remains to be seen whether the move to express many of the current guidelines as non-exclusive examples of governance practices will result in a shift in governance and disclosure practices.

For a full description of the current regime, see our newsletter A National Approach to Governance is Finalized. The Request for Comment can be accessed by clicking here.

About Ogilvy Renault

Ogilvy Renault LLP is a full-service law firm with close to 450 lawyers and patent and trade-mark agents practicing in the areas of business, litigation, intellectual property, and employment and labour. Ogilvy Renault has offices in Montréal, Ottawa, Québec, Toronto, and London (England), and serves some of the largest and most successful corporations in Canada and in more than 120 countries worldwide. Find out more at

Ogilvy Renault is the International Legal Alliance's Canadian Gold Award winner for 2008 in M&A and Corporate Finance.

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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