In an important development, the Canadian Securities Administrators (the "CSA") has proposed two diversity disclosure approaches: one focused on gender and the other encompassing a broader range of diversity measures.
This issue has divided Canadian provinces and territories. Certain Western provinces (i.e., British Columbia, Alberta and Saskatchewan) and the Northwest Territories support the first approach, while Ontario backs the broader approach. The rest of Canada, including Quebec, currently remain neutral. The divergence in preferences resulting in two different proposals is a reflection of Canada not having a national securities regulator.
What's next for diversity disclosure in Canada? We take a deep dive to explore the CSA's two proposed approaches and the potential implications for Canada's corporate landscape.
A. The Aerial View
On April 13, 2023, the CSA published a notice and request for comment regarding proposed additional corporate governance disclosure requirements (the "Proposals"), which will apply to a large number of Canadian public companies.
The Proposals are intended to elicit meaningful disclosure about how non-venture issuers identify and evaluate new candidates for nomination to the board, how they address board renewal, and how diversity is incorporated into those considerations.
The Proposals are in the "CSA Notice and Request for Comment – Proposed Amendments to Form 58-101F1 Corporate Governance Disclosure of National Instrument 58-101 Disclosure of Corporate Governance Practices and Proposed Changes to National Policy 58-201 Corporate Governance Guidelines".
The Proposals would apply to certain non-venture issuers, subject to National Instrument 58-101's carve-outs (i.e., would not apply to investment funds and SEC foreign issuers).
The Proposals build upon the existing 2014 "comply or explain" corporate governance disclosure requirements adopted by most CSA jurisdictions, other than British Columbia and Prince Edward Island, which prescribe certain information including mandated disclosure on representation of women on boards of directors and in executive officer positions (the "Existing Requirements"). If you are not familiar with the Existing Requirements, see this Timely Disclosure blog article for further information.
The Proposals describe two potential approaches – referred to as "Form A/Policy A" and "Form B/Policy B." The approaches differ between Form A and Form B with regard to proposed diversity disclosure (as the latter mandates disclosure on prescribed demographical data, e.g., Indigenous persons and LGBTQ2SI+), but are generally aligned with respect to proposed board nomination and proposed board renewal disclosure.
B. The Ground View – What Do the Proposed Rules Say?
Form A and Form B, if implemented, share the common goal of promoting transparency on diversity in boards and executive officer positions, in order to equip investors with useful information to assess how an issuer addresses diversity beyond gender.
Disclosure Requirements Related to Board Nominations and Board Renewal
Notably, both Form A and Form B largely align in terms of their disclosure requirements regarding board nominations and board renewal.
In comparison to the Existing Requirements (as currently detailed in Item 6 of Form 58-101F1 Corporate Governance Disclosure), the Proposals would:
- Expand upon the Existing Requirements by mandating disclosure regarding the board identification and evaluation process for nominating new candidates.
- Maintain the Existing Requirements regarding nominating committee disclosures (other than the next point).
- Remove the requirement to describe nominating committee's responsibilities, powers and operations.
- Add a new requirement to disclose whether the board has a written policy regarding the nomination process, and if not, the issuer would need to explain how the nomination process is conducted (subject to certain differences between Form A and Form B).
- Add new disclosures regarding management of nomination process conflicts of interest, whether the board has a composition matrix, and the skills, knowledge, experience, competencies and attributes of candidates considered during the evaluation process.
In comparison to the Existing Requirements (as currently detailed in Item 10 of Form 58-101F1 Corporate Governance Disclosure), the Proposals would:
- Maintain the Existing Requirements regarding the adoption of term limits.
- Add a new requirement to disclose how other mechanisms, other than term limits, contribute to effective board renewal.
- Expand upon the Existing Requirements to broaden the description of how board renewal is undertaken.
Disclosure Requirements Related to Diversity
Current Regime – The Existing Requirements and the CBCA Rules
With respect to diversity disclosure, the Existing Requirements prescribe certain disclosure regarding representation of women on boards and executive officer positions. These rules will remain intact.
Furthermore, corporations subject to the Canada Business Corporations Act and its regulations (the "CBCA Rules") are currently subject to certain mandated diversity disclosure, as follows:
- A comply or explain approach with respect to:
- whether a corporation has a written policy relating to the identification and nomination of directors from "designated groups" (which is based upon the federal Employment Equity Act's definition consisting of "women, Aboriginal peoples, persons with disabilities, and members of visible minorities");
- whether representation levels of "designated groups" are taken into account when nominating directors and senior management; and
- whether representation targets among board and senior management from each of the designated groups are in place.
- Disclosure regarding the number and proportion, expressed as a percentage, of members from each of the designated groups on the board and in senior management.
Proposed Regime – Form A and Form B
The divergence between Form A and Form B is what is required beyond the Existing Requirements with respect to groups of individuals other than women. The Proposals would be applicable for both CBCA and non-CBCA corporations. Accordingly, a CBCA issuer would need to comply with both the CBCA Rules and Form A or Form B, as applicable.
The CSA explains that Form A's approach promotes flexibility for issuers because it does not require data reporting on any specific group, and it "also removes securities regulators from defining to whom an issuer's approach to diversity must apply, other than women."
On the other hand, the Ontario Securities Commission (the "OSC") describes Form A as a "status quo approach, since it would not require an issuer to disclose diversity-related information and data beyond women unless an issuer chooses to collect data on those groups."
These groups are referred to as an "identified group", which is defined to mean "a group of individuals with a shared personal characteristic whose representation on the issuer's board or in its executive officer positions has been identified by the issuer as being part of the issuer's strategy respecting diversity, but does not include women."
In other words, if an issuer chooses not to collect data on a particular identified group, no disclosure regarding the number and proportion of persons from that identified group in board and executive officer positions would be required.
Beyond data reporting, issuers would nonetheless need to describe the following with respect to both women and any applicable "identified groups":
- "Approach" and "objectives" to maintaining board member and executive officer diversity.
- Written policies related to the above bullet point (or if no policy, explain).
- Targets (or if no target, explain).
Form B would require mandatory data reporting regarding these five "designated groups": "Indigenous peoples, LGBTQ2SI+ persons, racialized persons, persons with disabilities or women", each as further defined in Form B (e.g., "racialized persons" means "persons, other than Indigenous peoples, who are non-Caucasian in race or non-white in colour".)
Form B is more closely aligned with the CBCA Rules. One notable difference is that Form B also mandates disclosure for LGBTQ2SI+ persons.
Unlike Form A, an issuer does not have the option not to report data on such persons, and the information must be in a standardized tabular format (i.e., no optional narrative alternative provided).
Beyond data reporting, issuers also would be required to describe the following with respect to the "designated groups":
- "Written strategy" to maintaining board member (but not executive officer) diversity.
- Written policies related to the above bullet point (or if no policy, explain).
- Targets (or if no target, explain), presented in a standardized tabular format.
- Measurable objectives of the issuer's written strategy, other than targets.
- Number and proportion of current board members and executive officers, and those that filled vacant board seats during the prior year, who identify as being from designated groups (in addition to certain other required data), presented in a standardized tabular format.
It is worth noting that both Form A and Form B are silent with respect to certain other demographical data, such as age or religion of board members and executive officers.
C. What Will It Cost an Issuer?
The CSA does not anticipate a significant increase in regulatory burden with the implementation of the Proposals. The OSC, in its costs and benefits analysis, estimated that for both a CBCA and non-CBCA issuer to comply with Form A, it would incur an incremental annual average cost, over a ten-year period, of $506; to comply with Form B, such costs would be $732 and $804, respectively.
D. Where to Next?
The public comment period runs until July 12, 2023, after which the CSA will analyze the feedback received. In particular, the CSA is seeking input on several items, such as: Form A versus Form B preferences; confidentiality or other concerns relating to disclosure of skills, knowledge, and experience of candidates; issues or challenges for CBCA-issuers to comply with additional disclosure requirements; and whether data disclosure of any specific groups, other than women, should be mandated.
Only time will tell whether a uniform approach will be adopted across Canada, or whether we are left with a fragmented disclosure regime in different Canadian jurisdictions as is currently the case for the Existing Requirements.
If you have any inquiries regarding the Proposals, please do not hesitate to contact your Fasken lawyer or refer to the list of designated contacts listed in section F for further assistance.
E. Further Fasken Insight
You might be wondering: Why now?
Read Fasken's bulletin titled "ESG 2023 Update: While Diversity and Social Awareness Are on the Rise, Canadian Regulators Remain Divided on Diversity Disclosure Approach" to further explore this question in various jurisdictions around the world and the increased prominence of the "S" or "social" issues within the ESG realm.
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.