Reporting issuers in Canada are subject to governance standards and continuous disclosure obligations under securities laws and stock exchange rules.
From time to time, securities regulators, including the Canadian Securities Administrators (CSA), the Ontario Securities Commission (OSC), and stock exchanges, revise these disclosure rules or publish guidance to clarify their expectations regarding compliance with those rules. In addition, each year proxy advisory firms Institutional Shareholder Services Inc. (ISS) and Glass Lewis & Co. (Glass Lewis) update their annual voting guidelines, which set out governance and disclosure policies that guide their voting recommendations. Finally, the Canadian Coalition for Good Governance (CCGG) publishes annual “best practice” guidelines for governance standards and related disclosure by reporting issuers and additional policies relating to specific matters.
This Update discusses relevant governance and disclosure rule updates and related guidance for the upcoming 2023 annual reporting and proxy season, including with respect to continuous disclosure, board diversity, executive pay and environmental, social and governance (ESG) issues.
This Update does not provide a comprehensive description of the documents referenced below. These documents should be reviewed when preparing this year’s annual reporting and proxy materials.
Highlights of Relevant Updates and Guidance
The following are highlights of the updates and guidance regarding disclosure and proxy rules for the 2023 annual reporting and proxy season, described in more detail below.
1. On December 1, 2022, the OSC published Staff Notice 51-734 Corporate Finance Branch 2022 Annual Report, which summarizes key disclosure trends and guidance coming out of the OSC’s annual continuous disclosure review program. Key focuses of the OSC’s 2022 continuous disclosure review were MD&A deficiencies (including those relating to the requirement to update previously issued forward-looking information and discussion of variances in operations), the use of non-GAAP and other financial measures, overly promotional press releases, timely filing of material contracts, diversity disclosure, related-party transactions/cross financial interests, disclosure considerations pertaining to the war in Ukraine, syndicated mortgages, filing reports of exempt distribution and the crypto asset industry (including the applicable statutory regime).
2. On April 7, 2022, the CSA published for Notice and Comment Proposed Amendments and Proposed Changes to Implement an Access Equal Delivery Model for Non-Investment Fund Reporting Issuers that would implement an “access equal delivery” model for certain public company filings by non-investment fund reporting issuers. The model would allow issuers to comply with statutory delivery requirements for certain documents by uploading documents to the System for Electronic Document Analysis and Retrieval (SEDAR) and issuing a news release informing investors of their availability, noting that paper or electronic copies are available upon request. For further details, refer to our April 11, 2022 Update, Canadian Securities Administrators Publish Proposed Access Equals Delivery Model. There have been no updates from the CSA on the comment process or timing for implementation.
3. On October 26, 2022, the CSA published CSA Multilateral Staff Notice 58-314 Review of Disclosure Regarding Women on Boards and in Executive Officer Positions (“CSA Notice 58‑314”), which reviews public disclosure regarding women on boards and in executive officer positions, as required by Form 58-101F1 Corporate Governance Disclosure of National Instrument 58-101 Disclosure of Corporate Governance Practices.
4. On November 3, 2022, the CSA published Staff Notice 51-364 Continuous Disclosure Review Program Activities for the fiscal years ended March 31, 2022 and March 31, 2021 (“CSA Notice 51-364”), which reports on the results of a program put in place to improve the completeness, quality and timelines of continuous disclosure provided by reporting issuers. The notice summarizes common deficiencies found in the disclosure of reporting issuers, particularly with respect to financial statements, MD&As and overly promotional disclosure pertaining to ESG matters, among other deficiencies. For further details, refer to our November 9, 2022 Update, CSA Announces Results of Continuous Disclosure Review for Fiscal Years 2021 and 2022 Emphasizing Challenges of Disclosure During Economic Uncertainty.
5. On January 31, 2023, the CSA published Staff Notice 51-930 CSA Coordinated Blanket Order 51-930 - Exemption From the Director Election Form of Proxy Requirement, which creates an exemption for reporting issuers incorporated under the Canada Business Corporations Act (CBCA) from the form of proxy requirement under subsection 9.4(6) of National Instrument 51-102 (“NI 51-102”) in respect of the uncontested election of directors. The exemption aims to respond to concerns that the recent CBCA majority voting amendments (see “Legislative Amendments” below), which require the form of proxy to provide shareholders with the option to cast their vote “for” or “against” each candidate nominated for director in an uncontested election, are inconsistent with the NI 51-102 requirements, which require the form of proxy to provide shareholders with the option to specify “voted” or “withheld” in respect of the election of directors in an uncontested election. By exempting CBCA-incorporated issuers from the form of proxy requirement under NI 51-102, issuers will be able to comply with the majority voting requirements under the CBCA. For further details, refer to our February 1, 2023 Update, New CSA Exemption Clarifies Proxy Requirements for Uncontested Director Elections of CBCA Public Companies.
6. Proxy advisory firms ISS and Glass Lewis each published annual updates to their proxy voting guidelines that generally apply to Canadian-incorporated companies listed on the TSX and NEO exchanges for the upcoming 2023 proxy season: 2023 Canada Proxy Voting Guidelines Updates and 2023 Proxy Paper Guidelines Canada, respectively. These guidelines are covered in more detail in our discussion of the 2023 proxy season themes below.
7. The CCGG released its annual guide on 2022 Best Practices for Proxy Circular Disclosure. In its 2022 guide, the CCGG has highlighted many of the same principles surrounding disclosure as noted previously. Notable updated recommendations include those relating to, among other things, board composition, diversity, succession planning, director competencies and assessments, board oversight, shareholder engagement and executive share ownership requirements.
8. On August 31, 2022, the proposed amendments to Bill C-25 An Act to amend the Canada Business Corporations Act, the Canada Cooperatives Act, the Canada Not-for-profit Corporations Act, and the Competition Act came into force. The amendments include a majority voting requirement, mandatory annual election of directors, mandatory individual director voting (as opposed to slate voting), and changes to the period during which shareholders must deliver shareholder proposals. Importantly, several of the amendments, including notice-and-access, say-on-pay, and mandated disclosure regarding clawback policies are not yet in force and will come into force on a day to be fixed by the Governor in Council once the associated regulations are published.
2023 Proxy Season Themes
Board Gender Diversity
In 2023, ISS will generally recommend voting against the chair of the nominating committee (or directors responsible for board nominations) of a S&P/TSX Composite Index company that has a board comprised of less than 30% women, regardless of whether the company has publicly disclosed a written commitment to achieve such representation. This policy does not apply to companies that recently joined the S&P/TSX Composite Index and were not previously subject to ISS’s guidance or to companies that fall below the 30% representation threshold due to extraordinary circumstances after meeting the standard at their last annual meeting.1 For TSX companies that are not members of the S&P/TSX Composite Index, ISS will generally recommend voting against the chair of the nominating committee (or directors responsible for board nominations) where there are no women on the board of directors. This policy will not apply to companies that have just gone public within the current or prior fiscal year, companies that have transitioned from the TSXV within the current or prior fiscal year, or companies with four or fewer directors. An exception will be made for TSX companies that are not members of the S&P/TSX Composite Index and that temporarily have no women on the board as a result of extraordinary circumstances; provided that the company had at least one woman on the board at the preceding annual meeting and has publicly disclosed a written commitment to add at least one woman to the board at or prior to the next annual meeting.
In 2023, Glass Lewis transitioned from a fixed numerical approach to a percentage-based approach to board gender diversity and will generally recommend voting against the nominating committee chair of any TSX company board that is not at least 30% gender diverse, as well as all members of the nominating committee of a board with no gender diverse directors. Glass Lewis may refrain from recommending that shareholders vote against directors of companies when a board provides sufficient rationale or a plan to address the inadequacy of gender diversity on the board.
The CSA noted in CSA Notice 58-314 that issuers should strive to present diversity data in a common tabular format to improve consistency and comparability, with a view toward helping investors efficiently identify and evaluate the relevant disclosure.
Board Racial and Ethnic Diversity
Beginning with meetings on or after February 1, 2024, ISS will generally recommend shareholders vote against the chair of the nominating committee (or directors responsible for board nominations) of a S&P/TSX Composite Index company where the board has no apparent racially or ethnically diverse members.2 In addition, ISS will evaluate on a case-by-case basis whether a recommendation to vote against is warranted for additional directors at S&P/TSX Composite Index companies that fail to meet this policy over two or more years. ISS will except companies whose board was racially or ethnically diverse at the last annual meeting and where the board has firmly and publicly committed to appoint at least one racially or ethnically diverse member at or before its next annual meeting.
Climate Risk and Environmental and Social Issues
For 2023, ISS is extending its climate accountability policy globally and is clarifying the factors considered under the policy. For companies that are significant greenhouse gas (GHG) emitters3 through their operations or value chain, ISS will generally vote against the incumbent chair of the responsible committee (or other directors on a case-by-case basis) in cases where ISS determines companies are not taking the minimum steps required to understand, assess and mitigate climate change risks. These steps include, among other things, detailed disclosure of climate-related risks, such as those according to the framework established by the Task Force on Climate-related Financial Disclosures (TCFD) and appropriate GHG emissions reduction targets. According to ISS, appropriate GHG emissions reductions targets will be medium-term GHG reduction targets or Net-Zero-by-2050 GHG reduction targets for a company’s operations and electricity use.
Glass Lewis believes that climate risk is a material risk for all companies and that companies, particularly those whose GHG emissions represent a financially material risk, should provide clear and comprehensive disclosure of climate risks, including how such risks are being mitigated and overseen. In 2023, where companies with increased climate risk exposure have not provided thorough TCFD-aligned climate-related disclosure or have not explicitly and clearly defined board oversight responsibilities for climate-related issues, Glass Lewis may recommend voting against a responsible member or members of the board.
In addition, in 2023, Glass Lewis will generally recommend voting against the governance committee chair of any S&P/TSX Composite Index company that does not provide explicit disclosure regarding the board’s role in overseeing environmental and social issues.
In CSA Notice 51-364, the CSA expressed concerns regarding ESG disclosure and the recent rise in “greenwashing”, which occurs when issuers make potentially misleading, unsubstantiated or otherwise incomplete claims about business operations or sustainability. The CSA noted that issuers must be careful in not misleading investors with overly promotional language in respect of ESG disclosure.
ISS confirmed that, in respect of TSXV-listed issuers, for meetings on or after February 1, 2023, ISS will generally recommend shareholders vote against individual directors who are non-CEO directors and serve on more than five public company boards, or are CEOs of public companies who serve on the boards of more than two public companies besides their own.4 This policy aligns the overboarded director policy for venture issuers with the existing policy for TSX-listed companies.
Beginning in 2023, Glass Lewis will generally recommend shareholders vote against a director of a TSX company who serves as an executive officer of one public company while serving on more than one additional external public company board.
Glass Lewis has stated that cyber risk is material for all companies and that a company’s stakeholders would benefit from clear disclosure regarding the board’s role in overseeing issues related to cybersecurity. While Glass Lewis will generally not make recommendations on the basis of a company’s oversight or disclosure concerning cyber-related issues, Glass Lewis may recommend shareholders vote against appropriate directors in instances where cyber-attacks have caused significant harm to shareholders and Glass Lewis finds the company’s disclosure or oversight to be insufficient.
ISS updated its guidance concerning non-employee director (NED) deferred share unit (DSU) plans to (i) note that ISS will consider various elements to assess whether a DSU plan is deemed to be beneficial overall to shareholder interests; (ii) recommend that shareholders vote for a NED deferred compensation plan if DSUs may only be granted in lieu of cash fees on a value-for-value basis; and (iii) recommend that shareholders vote for a NED deferred compensation plan that permits discretionary grants (not only in lieu of cash fees) if certain criteria are met.
In 2023, Glass Lewis increased its threshold for the minimum percentage of long-term incentive awards that should be performance-based from 33% to 50%. As a result, Glass Lewis will raise concerns with executive pay programs that provide for less than half of an executive’s long-term incentive awards to be subject to performance-based vesting conditions.
Other Governance Matters
Glass Lewis issued several other “clarifying” amendments to its guidelines, including those relating to multi-class share structures with unequal voting rights, compensation committee performance, shareholder say-on-pay, one-time compensation awards, the use of “front-loaded” compensation awards, and compensation committee discretion on incentive payouts.
Other Notable Updates
Glass Lewis ESG Scores and Data
In February 2022, Glass Lewis announced the launch of an ESG scoring and data feature in its Proxy Paper research reports via a dedicated ESG profile page. This page will cover roughly 5,500 global companies during the 2023 proxy season, including some members of the S&P/TSX Composite Index. The scoring system focuses on four modules: Board Accountability, ESG Transparency, ESG Targets and Alignment, and Climate Risk Mitigation, with notable scoring datapoints including director independence, capital structures with inequitable voting rights, gender diversity, net zero carbon emissions targets, board oversight of climate-related issues and compensation linked to ESG factors. The data is collected near a public company’s annual meeting date, allowing for investor voting decisions and engagement to occur with timely data and research specific to agenda items. Although many of the factors considered in producing the ESG score impact Glass Lewis’s benchmark recommendations, a company’s ESG score itself will have no direct bearing on any of Glass Lewis’s recommendations.
A complete list of ESG scoring datapoints considered by Glass Lewis in all four modules can be found here.
To discuss any of these developments, please contact any member of our Capital Markets Group.
1 In such cases, companies must have publicly disclosed written commitment to achieve at least 30% women on the board at or prior to their next annual meeting.
2 Racial and/or ethnic diversity is defined as Aboriginal peoples (meaning persons who are Indigenous, Inuit or Métis) and members of visible minorities (meaning persons, other than Aboriginal peoples, who are non-Caucasian in race or non-white in colour).
3 Companies defined as “Significant GHG emitters” are those on the current Climate Action 100+ Focus Group list.
4 For CEOs, the recommendation will only apply to their outside boards.
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