This alert sets out legislative, regulatory and "advisory" developments in respect of corporate governance and annual disclosure matters. These will impact Canadian public companies when preparing their proxy-related materials. It is organized as follows:
- New developments
- Canadian Securities Administrators
(CSA) policy and rule amendments
- Climate change-related risk
- Governance and disclosure for cannabis industry issuers
- Canada Business Corporations Act (CBCA) amendment – Enhanced diversity disclosure
- Proxy Advisor Updates: Institutional Shareholder Services (ISS), Glass Lewis, Canadian Coalition for Good Governance (CCGG)
- Canadian Securities Administrators (CSA) policy and rule amendments
- Reminder of recent (pre-2019) developments
- CSA 2018 continuous disclosure review
- Governance snapshot
- Women on boards and in executive officer positions
- Coming developments
- CBCA changes not yet in effect
- Director elections
- Mandatory say-on-pay
- Compensation clawback
- Disclosure on well-being
- Coming governance developments
- Supply chain transparency
- Coming regulatory developments
- Access equals delivery
- New combined system for disclosure by issuers and insiders, and other national securities systems
I. New developments
1. CSA policy and rule amendments
A. Climate change-related risk
In August of 2019, staff of the CSA released a notice on Reporting of Climate Change-related Risks, highlighting that many institutional investors will be evaluating issuers based, in part, on their climate-risk disclosure.1 This includes "physical risks" to an issuer's operations from acute events and chronic changes to the climate, as well as risks and opportunities related to the transition to a low-carbon economy.
The notice should inform the preparation of MD&A and annual information forms, where applicable risk disclosure is required.2 Issuers should use those documents to "inform investors about the sustainability of their business model", as well as to illustrate that they are addressing climate-related risks, in addition to discharging their disclosure obligations.
Regarding proxy materials and preparation for AGMs, the notice speaks to integrating climate risk assessment into board mandates, which, for non-venture issuers, must be disclosed in the circular. Moreover, being able to point to a robust disclosure record on climate change-related risks will assist issuers in addressing any applicable questions at an AGM.
Finally, the notice raises key questions for boards and management that should be considered as a matter of corporate governance, even if they do not directly impact an issuer's public disclosure.
B. Governance and disclosure for cannabis industry issuers
Cannabis companies should be aware of CSA Multilateral Staff Notice 51-359 Corporate Governance Related Disclosure Expectations for Reporting Issuers in the Cannabis Industry, released in November of 2019. This includes guidance on assessing whether directors are independent of the issuer, which affects circular disclosure, committee memberships and director nominations. It also provides guidance for merger and acquisition (M&A) disclosure.
CSA Staff note that certain directors of cannabis issuers have been identified as independent without a fulsome consideration of applicable factors, including "personal or business relationships with other directors and executive officers of the issuer." Such relationships will be relevant to any issuer in considering director independence, but cannabis issuers may be more likely to be impacted due to the recent emergence of the industry.
Cannabis industry issuers are also reminded of the CSA staff guidance from October of 2018 in respect of continuous disclosure, following a regulatory review of 70 cannabis reporting issuers. The focus of that guidance is the application and disclosure of accounting matters, such as fair value and non-GAAP measures, but it also speaks to non-financial matters, such as disclosure of production estimates and regulatory frameworks, and filing of material contracts.
2. CBCA amendment – Enhanced diversity disclosure
The Canada Business Corporations Act has undergone several recent changes, one of which will impact 2020 proxy materials. This is the requirement for any "distributing"3 CBCA company to disclose in its circular the number and percentage of board seats and senior management positions occupied by women, aboriginal peoples, persons with disabilities and members of visible minorities. CBCA distributing companies will have to rely on self-identification by members of these "designated groups," and, as such, they should revise their proxy season director and officer questionnaire accordingly.
As a related matter, the disclosure must contain a description of applicable corporate policies on diversity and board renewal.
This stems from the following new sections of the CBCA, and a more fulsome addition to the applicable regulations:
Diversity in corporations
172.1 The directors of a [distributing] corporation shall place before the shareholders, at every annual meeting, the prescribed information respecting diversity among the directors and "members of senior management" as defined by regulation.
Information to shareholders
172.2 (1) The corporation shall provide the information referred to in section 172.1 to each shareholder, except to a shareholder who has informed the corporation in writing that they do not want to receive that information ...
The definition of "senior management" is the same as that of "executive officer" under securities legislation.4
The significance of this change is twofold:
- It will impact all CBCA distributing companies, regardless of size, whereas securities regulation requires only non-venture (i.e., typically TSX-listed) issuers to make disclosure in respect of diversity and board renewal.
- The existing diversity disclosure rule focuses only on gender, and not the other designated groups, i.e., aboriginal peoples, persons with disabilities and members of visible minorities.
The change is effective for any annual meeting held on or after January 1, 2020.
3. Advisory Updates: ISS, Glass Lewis, CCGG
A. Appointment of auditor, election of audit committee members
ISS has made a minor change to its policy in respect of auditor re-appointments. The policy, in essence, is that non-audit-related fees paid to the auditor should not be "excessive". The change is that certain M&A-related fees may be excluded from the amount considered non-audit-related in determining the reasonableness (or excessiveness) of the auditor's compensation.5
This change has a related impact on the assessment of the audit committee members. ISS generally opposes the election of such directors if the non-audit-related fees paid to the auditor are excessive.6
B. Audit committee meetings (TSX)
Beginning in 2021, Glass Lewis will withhold support from:
- The governance committee chair when the number of audit committee meetings in the previous year is not disclosed; and
- The audit committee chair if that committee does not meet at least four times per year.7
C. Majority-owned companies
The ISS policy setting out when it will support a majority shareholder (or one or more representatives of such person) on the board has been amended to clarify that it applies only to non-management directors.8
D. Director attendance (TSX)
An amendment to the ISS policy in respect of director attendance for TSX issuers allows case-by-case consideration of directors who have only served for part of the year and in respect of companies that have graduated from a junior exchange.9 A clarification adds that a 75 percent meeting attendance threshold applies to the aggregate of the applicable committee and full board meetings.
Glass Lewis will withhold support for the chair of the governance committee when records of board and committee attendance are not disclosed.10
E. Board skills
F. Former CEO / CFO on audit or compensation committee (TSX)
ISS recommends withholding votes for a director who has served as the CEO of the company in the previous five years, and who is a member of the audit or compensation committee. This has been extended to catch any director who has been CEO of an affiliate or a company acquired in the previous five years.13
The related "generally withhold" standard for a director who has served as CFO of the company within the previous three years, and who serves on the audit or compensation committee, has similarly been extended to cover acquired and affiliated companies.14
G. Overboarded directors (TSX)
ISS considers an individual to be "overboarded" in respect of a TSX issuer if s/he either:
- Is CEO of a public company, and serves on the board of three or more other companies; or
- Is not a CEO, and serves on six or more public company boards.
In applying this pre-existing rule, ISS will now take into account whether the director has disclosed plans to resign from another company at the following AGM of that company.15
H. Equity-based compensation plans (Canadian Securities Exchange)
Two ISS changes address "evergreen" equity compensation plans, being those in which the number of shares issuable is automatically replenished. The TSX and TSX Venture Exchange require periodic approval of such plans, but the Canadian Securities Exchange does not.
An immediate change provides that ISS will oppose an evergreen plan that does not require approval at least every three years. The second change, to be implemented in 2021, will recommend withholding votes for members of the compensation committee of issuers with such non-reapproved plans.16
I. Contractual payments and arrangements
Glass Lewis's most far-reaching update relates to its guidance on executive compensation.17 Though it purports be a clarification, the new guidance raises a number of potential concerns and relevant factors.
This focuses on sign-on awards and severance benefits, change in control provisions and amended employment agreements. Change of control provisions should be "double trigger" – requiring termination or constructive termination in addition to a control change – and issuers should avoid guaranteed bonuses, especially multi-year guarantees. The policy also encourages disclosure and explanation of sign-on benefits and any non-predetermined severance payments.
J. Company response to say-on-pay
Glass Lewis updated its guidance on appropriate responses in the event of "low" shareholder support for executive compensation, meaning where more than 20 percent of the votes cast were against a say-on-pay proposal. In such event, an issuer's actions should include consultation with large shareholders and, where reasonable, changes to identified pay practice issues. The appropriate level of responsiveness will depend on the magnitude and "persistence of shareholder discontent over time."18
K. Use of Non-GAAP measures in executive compensation
The CCGG has highlighted that non-GAAP financial measures are seeing increased use in determining executive compensation awards.19 While making clear that there is nothing wrong with such practice, it offers guidance on applicable circular disclosure. Examples of effective discussion and analysis in this area are set out in CCGG's most recent Best Practices publication.20
II. Reminder of recent developments
1. CSA continuous disclosure review
Staff of the CSA conducts reviews of continuous disclosure on an ongoing basis, and reports on those reviews every other year. The most recent report, from July of 2018, focused mostly on financial statement and MD&A matters, as is typical.
Regarding circular disclosure, this report included a reminder for any issuer using an external management company for executive management. Funds paid to such management companies that are attributable to a director or "named executive officer" of the issuer must be disclosed in the issuer's summary compensation table.
III. Governance snapshot
1. Women on boards and in executive officer positions
Non-venture public companies have been required to disclose the number of women directors and executive officers since 2015, and to make certain associated disclosures, such as progress in achieving objectives in this area. There remains no quota system for gender or other diversity at Canadian companies, public or private.
Data from the five years of reporting show some improvements in several gender diversity metrics.21 Among issuers subject to the disclosure rule, the proportion with at least one woman on the board has increased from under half to almost three quarters. The share of such issuers with a gender diversity policy is also up, from 15 to 50 percent.
These increases may stem, in part, from external pressure. For example, both ISS and Glass Lewis recommend the adoption of a written diversity policy and having at least one female board member.22
Other metrics, however, are less encouraging for proponents of gender equity, especially on close inspection. The share of aggregate board seats occupied by women has increased by half, but from a low base, so the most recent measure of 17 percent remains underwhelming. A mere four percent of issuers had a woman CEO, and five percent had a female board chair.
Non-binding shareholder votes on executive compensation, i.e., say-on-pay, remain voluntary in Canada. However, such practice has been adopted by most of the biggest public companies, including 86 percent of TSX-60 issuers. Of these, the vast majority conduct the vote on an annual basis.23
The United States and the United Kingdom have both mandated say-on-pay, though with some procedural complexities. US issuers are required to solicit say-on-pay at least every three years, to have a vote on the frequency of such resolutions at least every six years, and to obtain an advisory vote in respect of certain "golden parachute" arrangements in the event of a merger.24 In the UK, issuers must conduct an advisory vote on actual compensation and a binding vote on pay policy.
Many countries in Europe and elsewhere have mandated some form of say-on-pay.
In Canada, the recent trends feature a steadily increasing number of issuers conducting say-on-pay votes, and some "downward pressure" on the average rate of shareholder approval. There was a 9.5 percent increase in the number of say-on-pay issuers between the 2018 and 2019 proxy seasons, which is likely due to pressure from ISS, Glass Lewis and others.25
The average rate of support is high, at almost 91 percent, but this is down about one percentage point from the previous year. There were only two failed (i.e., less than 50 percent supported) say-on-pay resolutions in each of 2018 and 2019.26
IV. Coming developments
1. CBCA amendments: Director elections, notice-and-access, mandatory say-on-pay, compensation clawback, disclosure on well-being
Several governance amendments to the CBCA have been enacted but are not in force. All will require regulations, which will likely be preceded by public consultation. These include the following, applicable to distributing corporations:
- Regarding director elections:27
- "Majority voting" will be required, such that for non-contested meetings a director is only elected if s/he receives more votes in favour of their election than votes "against". This will, in essence, extend the rule applicable to TSX-listed companies to all CBCA distributing corporations. For venture issuers, the current practice technically allows a director to be elected if s/he receives only a single vote in favour, irrespective of the number of votes "withheld".
- Directors will have to be elected every year rather than at least every three years as is currently the case. This is a current requirement of the TSX and the TSX Venture Exchange.
- Shareholders will be entitled to vote on directors individually, rather than by slate. This is also required by the main stock exchanges.
- Use of notice-and-access will be facilitated. CBCA issuers are not currently able to use the notice-and-access regime for delivering proxy-related materials without obtaining an exemption. This will streamline delivery of information circulars, financial statements and MD&A.28
- A requirement for an annual say-on-pay resolution. This is not currently required by Canadian securities laws or stock exchange rules, though, as discussed above ("Governance Snapshot – Say-on-pay"), most of the biggest public companies have adopted such practice.29
- Disclosure of the following matters:30
- The company's policy on clawback of incentive compensation.
- Information in respect of "the well-being of employees, retirees and pensioners".
The implementation timeline is not known, other than the director election amendments (paragraphs (a) and (b) above) are more advanced than the say-on-pay and other disclosure requirements (paragraphs (c) and (d)).
As noted, regulations and public consultation are expected to precede implementation of these rules.
2. Coming governance developments: Supply chain transparency
There has been some progress in Canada relating to supply chain transparency, but no legislation. Many other jurisdictions have implemented rules regarding forced labour in supply chains, often referred to as "modern slavery", including Australia, California, France and the UK.31 In 2019, Canada's Parliament engaged in consultation on whether it should legislate in this area, and whether it is constitutionally permitted to do so.32 The re-election of the federal government increases the likelihood of legislative or policy action.
Many Canadian companies have adopted supply chain codes of conduct. Some are required to do so, whether through operations in an adopting jurisdiction or as supplier to a company in such jurisdiction, and others have done so voluntarily.33
Recent judicial action in this area has seen mixed results, with a recent Canadian case among the successes by alleged victims of modern slavery. This involved a class action by Eritrean labourers at a mine majority-owned by a Canadian public company, where forced labour was alleged to have occurred.34 This, and a related case, have successfully pleaded violation of "customary international law" rather than any legislative requirement.35
By contrast two high-profile California lawsuits alleging contravention of supply chain legislation have failed.36
3. Coming regulatory developments
- Access equals delivery
The CSA is in consultation on an "access equals delivery" model for certain disclosure documents. This would allow non-investment fund reporting issuers to effect delivery by issuing one or more news releases, posting the document(s) and news release(s) on its website, and filing it all on SEDAR.
While there is no formal proposal as of yet, the consultation paper signals that establishing such a model for prospectuses, financial statements and MD&A could be a priority. Proxy-related materials and bid circulars could also be integrated into the model, though possibly in a second implementation step.
- New combined system for disclosure by issuers and insiders, and other national securities systems
The CSA is working to replace the current systems for public filings by issuers (SEDAR) and insider reporting (SEDI), among others, with a single comprehensive system called SEDAR+. This will be developed in phases, with the first being the SEDAR replacement, scheduled for 2021. This first phase will also consolidate the Disciplined Persons List and the Cease Trade Order Database into SEDAR+. Other systems, including SEDI, will be rolled into the new site thereafter.37
3. This includes CBCA reporting issuers and any CBCA company that is listed on a stock exchange but not a reporting issuer in Canada. ↩
4. That is: "(a) the chair and vice-chair of the board of directors; (b) the president of the corporation; (c) the chief executive officer and chief financial officer; (d) the vice-president in charge of a principal business unit, division or function, including sales, finance or production; and (e) an individual who performs a policy-making function in respect of the corporation." ↩
5. ISS Americas Proxy Voting Guidelines Updates for 2020 (ISS Updates), p. 16. ↩
6. ISS Updates, pp. 17-18. ↩
8. ISS Updates, pp. 19-20. ↩
9. ISS Updates, p. 21. ↩
10. Glass Lewis, p. 2. ↩
11. Glass Lewis, p. 2. ↩
13. ISS Updates, p. 22. ↩
14. ISS Updates, p. 22. ↩
15. ISS Updates, p. 23. ↩
16. ISS Updates, p. 24. ↩
17. Glass Lewis, pp. 32-33. ↩
18. Glass Lewis, p. 27. ↩
21. The figures in this section are taken from CSA Multilateral Staff Notice 58-311, Report on Fifth Staff Review of Disclosure Regarding Women on Boards and in Executive Officer Positions, October 2, 2019. ↩
22. Glass Lewis "will generally recommend voting against the nominating committee chair of a board that has no female members", and it may make such recommendation if the board has not adopted a written policy (Glass Lewis, p. 20). ISS will "generally vote withhold" for such committee chair where the issuer has neither a written policy nor any female board members (Canada Proxy Voting Guidelines for TSX-Listed Companies, p. 14), though only for "widely held" issuers and subject to exemptions. ↩
23. Briefing Note: State of Say on Pay in Canada, April 2019, Shareholder Association for Research & Education. ↩
26. Above, note 25, p.3. ↩
30. Above, note 29. ↩
31. A list of jurisdictions, with short summaries of the applicable rule in each case, is included in Annex B of Canada's Supply Chain Consultations Issue Paper. Child labour, which was the explicit subject of the Parliamentary report that prompted the consultation, is typically considered a subset of modern slavery. ↩
36. These involved a global retailer and a global food and drinks company. ↩
Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com
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. Specific Questions relating to this article should be addressed directly to the author.