Written by Will Osler, Denise Bright, Steven Bodi and Kenryo Mizutani
On April 7, 2021, the Government of Canada published Diversity of Boards of Directors and Senior Management of Federal Distributing Corporations. The report is the first report on the effect of the government's efforts to increase diversity on corporate boards and in senior management in Canada.
Effective January 1, 2020, the Canada Business Corporations Act (CBCA) was amended to include reporting obligations about the diversity of corporate directors and senior management for distributing corporations—generally speaking, a public company—governed by the CBCA. For our earlier commentary on the amendment of the CBCA on diversity disclosure, see New Diversity Disclosure Requirements for Public CBCA Corporations.
Distributing corporations established under the CBCA are required to disclose to their shareholders (through their proxy circulars) and to Corporations Canada information regarding the diversity of their boards and senior management. The disclosure must include the representation of various "designated groups" on the board and among senior management. These "designated groups" include women, Indigenous peoples (First Nations, Inuit and Métis), persons with disabilities and members of visible minorities.
In addition, the CBCA requires distributing corporations to disclose whether they have a diversity and inclusion policy, and if not, to provide an explanation why not. This "comply or explain" approach is not prescriptive, but is intended to foster a dialogue between distributing corporations and their shareholders, increase corporate transparency and support the push for increased diversity on boards and in senior management.
Based on the proxy circulars filed in 2020, the Government of Canada identified 669 distributing corporations which were required to disclose diversity information. Of these distributing corporations, the proxy circulars of 469 were reviewed and 85.9 percent contained information on diversity.
The government conducted a detailed review of the disclosure for 403 distributing corporations (160 venture issuers and 243 non-venture issuers) in respect to the following key aspects linked to diversity:
- term limits and other mechanisms for board renewal;
- written policies for identifying and nominating members of designated groups for directors;
- consideration of the level of representation of designated groups;
- targets for representation of designated groups;
- representation of designated groups among boards of directors and senior management teams; and
- composition of distributing corporations' boards of directors and senior management teams.
The government's findings exclude the review of proxy circulars of 66 distributing corporations that did not include any diversity information. Of this group, 53 were filed by venture issuers and 13 by non-venture issuers. Venture issuers are not subject to gender disclosure requirements under provincial securities regulations, so the diversity requirements under the CBCA create new disclosure obligations for such issuers. The report is intended to establish a baseline of the diversity of boards and among senior management disclosed in 2020.
Term Limits and Board Renewal
Sixteen percent of the distributing corporations reviewed had some form of board renewal mechanism, including age limits, tenure limits, or both. Distributing corporations that chose not to adopt limitations on board renewals cited their concerns for losing experienced directors, reduced continuity of the board, and the existence of other mechanisms to ensure the effectiveness of board members.
Of the 403 distributing corporations that were part of the government's detailed review, 32 percent had adopted written policies for identifying and nominating women to the board. As for written policies for identifying and nominating Indigenous peoples, members of visible minorities, and persons with disabilities as directors, 26 percent of the distributing corporations had written policies. A significantly higher percentage of non-venture issuers than venture issuers had adopted policies. Commonly cited reasons of distributing corporations that had not adopted written policies include the size and stage of development of the corporation, merit-based selection, and the fact that policies were under consideration.
Consideration of Level of Representation
At the board level, 44 percent of the distributing corporations indicated that they considered the level of representation of women. As for other designated groups, approximately 35 percent of the distributing corporations considered the level of representation when identifying candidates for appointment or re-election. The results were similar with respect to identifying new members of senior management: 45 percent of distributing corporations considered the present level of representation of women and approximately 35 percent considered other designated groups' present level of representation.
Fewer distributing corporations set targets for representation of designated groups on the board and among senior management. At the board level, 14 percent of the distributing corporations had a target for female representation, and 1 percent had a target for representation of other designated groups. The most often cited reasons for distributing corporations without board targets were the size of the board and the existence of a merit-based system.
For senior management, 5.5 percent of the distributing corporations had targets for female representation, while between 0.2 to 1 percent had targets for other designated groups. The most often cited reasons for distributing corporations without senior management targets were candidates were selected on merit, small management teams and maintaining access to the broadest pool of candidates.
With respect to current representation of designated groups:
- 50 percent of the distributing corporations had at least one woman on the board;
- 47 percent had at least one woman in a senior management position;
- 16 percent had at least one member of a visible minority on the board;
- 22.8 percent had at least one member of a visible minority in a senior management position;
- 1.7 percent had at least one Indigenous person on the board;
- 1.2 percent had at least one Indigenous person in a senior management position;
- 1.7 percent had at least one person with a disability on the board; and
- 2.2 percent had at least one person with a disability in a senior management position.
The Government of Canada also studied board composition. Of the 403 distributing corporations studied, at the board level, women held approximately 17 percent of the board seats, visible minorities 4 percent, persons with disabilities 0.3 percent, and Indigenous peoples 0.3 percent. For senior management roles, women held approximately 25 percent of these positions, visible minorities 9 percent, persons with disabilities 0.6 percent, and Indigenous peoples 0.2 percent. Generally, the percentage of composition for the designated groups was higher for non-venture issuers than for venture issuers.
The report highlighted that the CBCA does not prescribe how to make the required diversity disclosure. As a consequence of the lack of standardization and other challenges (for example, individuals in more than one group), it was difficult for the government to compile accurate statistics. To try and address these issues, the government has published guidelines intended to encourage the move towards standardized diversity disclosure.
Many distributing corporations have started to adopt written policies on diversity and inclusion for their boards and senior management. Notably, the adoption rate is much lower for venture issuers. The report highlights that the review showed the disparity in the representation of the designated groups on boards and among senior management. The current report is the first report since the CBCA made diversity disclosure mandatory, and it will likely provide a benchmark for future initiatives. The Government of Canada expects to conduct a similar review for 2021.
Bennett Jones has extensive experience in corporate and governance matters. If you have questions regarding the CBCA reporting requirements on diversity, please contact a member of the Bennett Jones Capital Markets or Corporate Governance groups.