Thank you, Mr. Chair.
I would like to thank the committee for inviting me here today.
The Institute of Corporate Directors is Canada's association for boards and directors from the for-profit, non-profit, and crown sectors. We represent about 12,000 organizational and societal leaders who direct and lead their companies and play a significant role in determining the strategies for many of our country's most important institutions. We train Canada's board leaders and work with stakeholders to socialize the crucial importance of strong governance. The work we do with and on behalf of our members has a positive impact on Canada's economy by reinforcing trust and confidence in our institutions.
We have been working with the department for the past three and a half years to communicate our opinions regarding the review of the CBCA, and to express support for many of the initiatives that have ended up in the proposed legislation, such as the proposal to allow corporations to use notice and access. We would like to commend the government for the measured approach it has taken to this review.
Canada's corporate governance regime is a principles-based one. Our public issuers are subject to an evolutionary and fulsome set of rules and regulations through harmonized provincial securities regulation and stock exchange rules. This is a system that serves us well.
At the end of last year, I ended my term as the chair of the global policy committee of the Global Network of Director Institutes, which includes the major director organizations from 18 countries—from the U.S. and the U.K. to Pakistan and Malaysia. I can tell you that Canada's corporate governance is second to none, and that the common-sense approach we take and have taken is highly respected throughout the world.
In the interest of time, I will focus my remarks on two aspects of the proposed legislation: majority voting and diversity disclosure.
In our 2014 comment letter to Industry Canada, we expressed our support for the modernization of the CBCA but noted that our companies are also subject to a variety of rules, regulations, and legal precedents that inform their operations. Any changes to the legislation should not interfere with the mandates or decisions of those bodies, or add to the regulatory burden of companies by overlaying duplicative requirements. We noted that the TSX introduced a rule in 2014 that mandated majority voting policies at listed companies. This approach provides real consequences for directors who do not receive a majority of “for” votes, but provides boards with flexibility and a proper process to deal with the fallout from failed elections, i.e., when no directors are elected, when an insufficient number of the directors are elected to meet statutory or corporate by-law requirements, or when directors with a particular and necessary skill set are lost.
We support the government's intention to ensure that boards of directors have the confidence of shareholders. However, we continue to believe that the TSX rule is working well and that it may not be optimal to duplicate what has become standard for listed companies. We also note that the TSX rule does not apply to venture companies, which typically have concentrated share ownership and lower shareholder participation at AGMs. Given this, we don't believe that it is appropriate that CBCA amendments apply majority voting standards to venture companies. Moreover, while we know that the government has been attentive to our concerns over failed elections, we believe it is also important to to be mindful of potential similar unintended consequences of these amendments.
In a soon-to-be-released discussion paper, the law firm Hansell LLP—one of Canada's leading authorities on corporate governance matters—has flagged a number of potentially problematic consequences of the proposed amendments. These include uncertainty about the size of the board. That's to say that if a number of directors do not achieve a majority of “for” votes but the board still attains quorum, the board can continue to operate at a much reduced size, say from seven people down to three. Needless to say, a much smaller board may find it very hard to operate effectively. Another potential issue is the inability of shareholders to have a say on the replacement directors. Under the proposal, directors who remain in office can increase the size of the board by one-third. They can appoint whomever they want, and shareholders won't be able to approve or disapprove of them until the next AGM.
A final challenge concerns the potential actions of dissident shareholders. It's plausible that a dissident shareholder with a significant percentage of voting shares may use this change in the legislation to target one or more directors in a self-interested campaign. Without the ability to reject a director's resignation in exceptional circumstances, as is now the case, the board may lose quality directors because they were unfairly targeted.
We would welcome the opportunity to work with the government, and indeed with this committee, to help address these concerns—perhaps simply just through language—and to align the intent of the amendments with the practices that are already in the market.
I would like to spend a few brief minutes on diversity disclosure. First, we would like to congratulate the government for its leadership on this file and for signalling the importance of diversity on boards.
The ICD has been a consistent advocate for greater gender diversity on boards and was an early supporter of diversity disclosure, which eventually became the “comply or explain” rule.
In recent months, we've also been working with our friends at Catalyst Canada, the Canadian Coalition for Good Governance, the 30% Club Canada, Women in Capital Markets, the Business Council of Canada, and others to find new and better ways to socialize how business-critical board diversity is, and to help promote some of the thousands of experienced and effective women up the corporate ladder and into the C-suite and the boardroom.
The ICD believes that the more Canada views diversity as a driver of innovation, the better our boards, companies, and economies will perform. The equation is simple: greater diversity promotes better governance, which in turn promotes more innovation. After all, what is innovation but new thinking translated into the marketplace? In a world of blockchain, artificial intelligence, and market and political disruption, boards have to be more agile, disruptive, and innovative in their own thinking.
In our view, the case for gender diversity has been made. Unfortunately, Canada is a good distance away from where we need to be. In the fall of last year, the OSC reported that only 21% of public companies had adopted a board diversity policy and that only 12% of total board seats are occupied by women.
While disappointing, this isn't necessarily surprising. While many large cap companies have begun focusing on diversity, the Canadian public markets are fuelled by small and mid-cap companies that are often governed by directors who take off their workboots at the boardroom door. These directors are often just trying to keep the company going, maybe help find some more customers, and keep their people employed. Our job is not only to convince them that diversity on their board is good for business but also to make the process easy for them.
Before Christmas, the ICD in collaboration with the law firm Osler, Hoskin & Harcourt launched a board diversity policy template that provides all companies access to a template that allows them to choose how they will diversify their boards in a time frame that makes sense for their business. I believe the clerk has distributed to each of you a copy of this, with some supporting materials. We've had hundreds of downloads of this free tool, and we think it will help provincial regulators and the federal government achieve results that move the dial on gender diversity disclosure.
We're also focused on showing companies that identifying experienced, talented female candidates is not a barrier to board diversification. The ICD maintains a directors register that includes more than 3,500 women, nearly 1,000 of whom have their ICD directors designation, which means that they're not only board-ready but are also innovation-ready.
There are two items regarding the diversity amendments, however, to which we wish to draw the committee's attention.
First, we note that companies would also have to disclose whether they have a policy addressing diversity categories other than gender. While we agree that diversity goes beyond gender, we think it's important to recognize that policy levers regarding diversity really must start with gender. It is simply untenable that more than half of the country's population is so severely under-represented in corporate leadership positions.
The ICD teaches boards how to think broadly and critically. Integral to this is diversity of thought and experience, but we should be cautious to not signal to companies that having three male former CEOs from three different financial institutions constitutes diversity.
Second, we note that these amendments would apply to all distributing CBCA companies. Whereas provincial securities requirements exempt venture companies, federal legislation would mean that small issuers and small boards would be subject to the same reporting requirements as large cap banks or oil and gas companies.
To be clear, we are working to achieve greater diversity across all sectors of the economy, but we have to be realistic and understand that change will be slower in small cap companies—particularly, say, in mining or in IT—than it will be at the big five banks. The objective in the small cap sector is to better socialize the importance of diversity and to help build greater capacity. We look forward to continuing to work with the federal government to this end.
Thanks very much. I'm happy to take your questions.