Along with the continuing wave of environmental shareholder proposals, 2023 is marked by a strong interest in diversity and social issues, with more than 40 social related proposals filed by investors ranging from requests for third-party racial equity audits to operationalization of Indigenous informed consent, women in management, bilingualism, artificial intelligence, human rights and supply chain. Concurrently, board gender diversity in Europe, Canada and the US is reaching new heights, and ethnic and racial diversity in directorship is increasing rapidly in the US and slowly improving in Canada. For their part, legislators that are navigating diversity disclosure are often going different directions from one jurisdiction to another, even within the same country, as is currently the case in Canada and the US, and the latest proposed amendments to Corporate Governance Disclosure rules from the Canadian Securities Administrators (the "CSA") is another example of such diversity in points of view.

A. Diverse Views On Diversity

Canada's Mixed Bag of Proposals

On April 13, 2023, the CSA proposed and solicited feedback on two alternative approaches in order to amend the existing diversity disclosure requirements. These proposals reflect a continuing divergence of opinions on this topic across Canada's various securities regulatory jurisdictions, as in 2014, the first gender disclosure requirements in Canada (Form 58-101F1 - Corporate Governance Disclosure), were adopted by all but British Columbia and Prince Edward Island.

Now, the CSA is proposing two alternatives: (A) a flexible approach with regards to diversity disclosure beyond gender that does not require data reporting on any specific group, which is viewed as more desirable by British Columbia, Alberta, Saskatchewan and the Northwest Territories, or (B) a mandatory approach with data reporting regarding Indigenous peoples, LGBTQ2SI+ persons, racialized persons, persons with disabilities or women, which is viewed as more desirable by Ontario. The Ontario Securities Commission described proposal 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." The regulators in the rest of Canada, including Québec, have remained neutral for now. For more details on the CSA's proposals and their implications for issuers, please read Fasken's bulletin entitled "A Look into the CSA's New Diversity Disclosure & Related Corporate Governance Proposals".

It is worth noting that since 2020, all public companies incorporated under the Canada Business Corporations Act (the "CBCA") already must disclose data regarding board and management composition with respect to the following groups: women, Aboriginal peoples, persons with disabilities and members of visible minorities (being persons, other than Aboriginal peoples, who are non-Caucasian in race or non-white in colour).

Divergence in US Exchanges

In the US, the two major financial securities markets have taken divergent routes regarding imposing disclosure requirements or goals related to inclusion, diversity and gender equality in the board of directors of listed corporations. The NASDAQ requires detailed data on diversity. It generally requires under Rule 5605(f)(2)(A) that most listed companies have, or explain why they don't have, at least two members of their board of directors who are diverse, including (i) at least one female director; and (ii) at least one diverse director who self-identifies as LGBTQ+ or as Black, African American, Hispanic, Latinx, Asian, Native American, Alaska Native, Native Hawaiian, Pacific Islander, or two or more races or ethnicities. Since January 11, 2023, NASDAQ companies, under Rule 5606 – Board Diversity Disclosure, must also annually disclose, to the extent permitted by applicable law, information on each director's voluntary self-identified characteristics, using a Board Diversity Matrix listing each requisite diversity category.

Unlike the NASDAQ, the New York Stock Exchange opted for a market-driven approach, with no rules imposing inclusion or diversity goals or requirements. Instead, in 2019 it launched a Board Advisory Council, which aims to educate and provide opportunities for candidates from underrepresented groups through several events with listed companies that would like to increase diversity on their board of directors.

The European Union Leading on Gender
Europe leads the pack in terms of gender diversity with the adoption of mandatory quotas. By July 2026, women must represent 40% of non-executive directors of each listed company on the EU stock exchanges.

"Directive (EU) 2022/2381 of the European Parliament and of the Council of 23 November 2022 on improving the gender balance among directors of listed companies and related measures" also requires that women hold 33% of all director positions, including both executive and non-executive directors.

Under such directive, each EU member state shall require listed companies "to provide information to the competent authorities, once a year, about the gender representation on their boards, distinguishing between executive and non-executive directors and regarding the measures taken with a view to achieving the applicable objectives". Each EU member state also needs to put in place rules on penalties, such as fines, for companies that fail to comply with open and transparent appointment procedures, as well as empower a judicial body to annul the board of directors selected if it breaches the principles of the directive.

European jurisdictions have not generally appeared to impose requirements relating to disclosure of racial or ethnic diversity at public companies and in fact, the idea in itself to collect data in the field of ethnicity appears to be particularly sensitive in many EU member states, for historical reasons, as some argue that "data collection essentializes ethnic groups or contributes to race discrimination", according to a 2017 European Commission's report entitled "Analysis and comparative review of equality data collection practices in the European Union - Data collection in the field of ethnicity".

The Approach in the United Kingdom & Australia

The UK legislation resembles the CBCA's approach, but with a bit more teeth. "Policy Statement PS22/3 – Diversity and inclusion on company boards and executive management", which became effective on April 20, 2022, requires that companies listed in the UK include "a statement in their annual financial report setting whether they have met specific board diversity targets on a 'comply or explain' basis, as at a chosen reference date within their accounting period". The diversity targets include having at least 40% women on the board, one of the senior board positions being a woman, and one member of the board being from one of the following minority ethnic backgrounds: (1) Asian/Asian British; (2) Black/African/Caribbean/Black British; (3) Mixed/Multiple Ethnic Groups; or (4) Other ethnic groups, including Arab. Companies are required to publish numerical data in a standardized table.

In Australia, the Financial Conduct Authority (FCA) requires certain listed companies to have at least one member of the board from a minority ethnic background, and that the company's board diversity policy covers factors such as ethnicity, sexual orientation, disability and socio-economic background.

B. Gender Diversity At New Heights Internationally

The "comply or explain" approach adopted by most Canadian jurisdictions in 2014 regarding gender diversity has surely contributed to the increasing presence of women on boards over the last decade. From 2015 to 2022, the proportion of issuers with at least one woman on their board rose from 49% to 87%, according to the CSA's analysis of the disclosure of 625 TSX issuers.

Both in Canada and the US, significant gender diversity thresholds have been reached in 2023, with women representing 33.7% and 32.3% of board members, according to ISS Corporate Solutions, Inc. ("ISS"), who examined the boards of the 250 largest Canadian listed companies by market cap and the 500 largest US listed companies. In Canada, this means an increase of about 6% from three years ago.

In the 2022 CSA Multilateral Staff Notice 58-314 Review of Disclosure Regarding Women on Boards and in Executive Officer Positions (Year 8 Report), the CSA noted a correlation between issuers that adopted gender diversity measures and the percentage of board seats held by women, with 30% of board seats held by women among issuers with disclosed targets, compared to 20% among those without disclosed targets.

In the UK, women represented 53% of all non-executive directors, according to the 2022 UK Spencer Stuart Board Index, which covers the top 150 companies with a premium listing on the London Stock Exchange. European Council statistics show that 31.5% of board members in EU countries were women in 2022.

Interestingly, according to Moody's Breaking the Bias Report 2022, board-level gender diversity among North American and European companies rated by Moody's tends to be higher for companies with higher credit ratings.

C. Growing Racial and Ethnic Diversity In Corporate Canada

In 2020, Canadian publicly-traded corporations incorporated under the CBCA had to extend their disclosure to other designated groups, such as Indigenous peoples and persons from visible minorities, which appears to have impacted board composition in Canada. According to ISS, racial and ethnic minorities currently make up 14.1% of board directorships at Canadian public companies in the S&P/TSX Composite index (approximately 250 of the largest TSX companies by market cap), representing a material increase from 8.3% in 2020.

Visible Minorities on Canadian Boards
 14.1%    2020  2023
 Black  0.9%  3.13%
 Indigenous  0.36%  1.22%
 Hispanic/Latin  -  3.3%

ISS Corporate Solutions, Inc., 2023

Fasken's analysis of diversity disclosure of the 60 largest TSX companies reveals the following:

  • Of the 49 issuers that provide disclosure, 80% have at least one director from visible minorities.
  • Two issuers rise above the crowd, with 42% of directors from visible minorities at a multinational mining company incorporated under B.C. laws, and 36% at a CBCA midstream energy company.
  • Of the 27 issuers incorporated under the CBCA:
    • 74% have at least one director from visible minorities.
    • 63% have at least one executive officer from visible minorities.
    • 15% have at least one Indigenous director.
    • No issuer has Indigenous executive officers.

Canada is improving, but at a slower pace than in the US, where a 2023 study by ISS shows that non-Caucasians comprise 20% of board directorships in the 3,000 largest US public companies. Asian directors saw the biggest increase with a 55% jump in directorships over the last four years. Conversely, the proportion of directorships held by Caucasian directors fell by 9%, and now comprises approximately 80% of all directorships at companies covered in the analysis.

D. The "S" Wave In Shareholder Proposals

While the environment remains a strong concern of investors, social matters have also continued to gain traction in 2023. Fasken counted more than 40 social related proposals made by shareholders as of April 19, 2023, and the proxy season remains ongoing. Third-party racial equity audits, operationalization of Indigenous informed consent, women in management, bilingualism, artificial intelligence, human rights and supply chain are among the topics. This appears to be a continuation of 2022, as social matters already represented an important portion of shareholder proposals, as indicated in Fasken's 2023 ESG Disclosure Study .

This year, four Canadian big banks were asked by investors to conduct a racial equity audit, in order "to ensure that their business operations, practices, policies and products and services do not have adverse impacts on non-white stakeholders and communities of colour", stated the proposals. While three banks announced their commitment to conduct such an audit (one in 2022 and two in 2023) after having received shareholder proposals, two others decided to bring the matter to a vote by shareholders in April 2023. The results showed important support for such proposals with approval rates of 37.21% and 42.24%.

Among the other "S" proposals, shareholders of an airplane company and an international management and holding company requested that they publish a report every year on the representation of women in management, from entry level to top level.

Institutional Investors are also dancing the ESG dance, as proxy advisors increased their diversity standards for 2023. Glass Lewis now generally recommends voting against the chair of the nominating committee of TSX-listed companies with less than 30% "gender diverse" directors. Likewise, ISS recommends voting against the chair of the nominating committee where the board is not comprised of at least 30% women directors, although this only applies to S&P/TSX Composite Index companies.

ISS recently amended its voting guidelines such that in 2024, it expects companies that are part of the S&P/TSX Composite Index to have at least one racially or ethnically diverse director.

E. Thinking Ahead On Diversity

The proposed amendments to the CSA's Corporate Governance Disclosure Rules do not yet provide clarity on what diversity disclosure requirements Canadian public companies may be subject to under securities laws. Even internationally, there are differing approaches taken to diversity disclosure. Where there is uncertainty in regulatory requirements, the question always arises as to whether the market will step in to require certain disclosures from companies. Particularly for larger companies, with institutional investors, in addition to complying with specific mandates, such companies may consider providing increased diversity disclosure in response to investor requirements.

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