Canadian Federal Corporate Governance Changing

Nicholas J Price
Without a federal law to rely upon, the Toronto Securities Exchange took their own action in 2012 and mandated some of the same principles for good corporate governance as have become commonplace in nearly every other part of the world. Canadian corporations that don't fall under the requirements of the Toronto Securities Exchange or other regulators were previously only subject to their own honor systems. A new Canadian bill seeks to codify a few good corporate governance principles to keep pace with stricter standards that securities exchanges and regulators in the finance industry expect across the globe.

About the Canada Business Corporations Act

The Canada Business Corporations Act, which is commonly known as CBCA, is an Act of Canada's Parliament pertaining to business corporations. Corporations may fall under federal law or under a similar provincial law. CBCA came into force in 1975, after a task force formed in 1967, and provided Canada's first comprehensive review of federal corporate law since 1934.

CBCA provides the framework for corporate governance for many Canadian corporations of all sizes. The Act covers nearly 235,000 companies, including over 700 publicly held corporations. About half of Canada's largest publicly traded corporations filed their charters with CBCA.

Federal laws have not kept pace with the requirements of security exchanges and other regulatory bodies. While many corporations have followed the lead of global corporate governance principles, corporations under CBCA have largely been left to their own devices to set standards for good corporate governance. If passed, a new Canadian bill will bring federal securities more in line with global expectations.

It's About Time for C-25

There's a new bill called C-25 addressing corporate governance making its way through the Canadian Parliament. The bill has passed the third reading in the House of Commons and is currently being debated in the Senate.

Members of Parliament recognize that the Toronto Securities Exchange and other securities regulators have already adopted many of the expected corporate governance principles in some form.

Critics of the new law have a few concerns, but overall, most corporations and advocacy groups feel that the changes are long overdue and welcome the concept of the bill. Two of the bill's provisions that have the corporate world excited relate to director appointments and diversity.

Potential Changes to Director Voting

CBCA still uses the plurality standard, which means that shareholders can choose from two options in uncontested elections for board directors. They can either vote for the nominee that management selects or they can withhold their vote altogether.

Directors who choose to withhold their votes do so understanding that their vote will be viewed the same as if they had abstained from the vote. It just doesn't count. This arrangement creates a ripe environment for directors to win an election without the support of the majority of the shareholders. Since board directors represent the shareholders' interest, investors may not feel like they are being fairly represented. In a rare, but odd, circumstance, a board director could gain an appointment with just one vote, and it could be his or her own vote.

The Toronto Securities Exchange didn't wait for the Canadian Parliament to catch up. Up until recent decades, Canada was largely alone in allowing slate voting. Prior to that time, many boards offered one slate of new board directors at election time, forcing shareholders to vote in favor of or against the entire slate. Slate voting isn't popular among shareholders because it sometimes allows ill-favored board directors to become elected along with the rest of their slate.

A 2012 Toronto Securities Exchange rule disallowed slate voting for corporations under its rule.

In another corporate governance advancement, the Toronto Securities Exchange mandated majority voting in 2014. This means that uncontested nominees must get a majority of votes before receiving a board appointment. Without this mandate, boards were at liberty to follow the votes of shareholders or to use their own discretion in making board appointments. In essence, they were allowed to view shareholder votes in an advisory capacity rather than a mandatory regulatory rule. As a result, some corporations appointed nominees in spite of strong shareholder opposition.

The Toronto Securities Exchange enacted minor advancements toward board diversity. Their rules apply only to gender.

If passed, C-25 makes major improvements to standardizing corporate governance. C-25 largely removes the ability of boards to use their own discretion when attempting to overrule shareholder voting. The law makes provision for exceptions to board discretion under certain circumstances.

Boards may use their own discretion in approving nominees if they need the appointment to comply with the required 25% of board directors being Canadian. C-25 also gives boards discretion when they need to meet the mandated minimum for two non-employee or non-officer directors.

C-25 forbids many corporations to use slate voting in favor of majority voting. The passage of C-25 would codify the government's desire to move away from slate voting.

Diversity is another corporate governance principle that C-25 addresses. The bill doesn't call for any type of quota, but it goes beyond the gender mandate in the Toronto Securities Exchange rule. If passed in its current form, C-25 would require corporations to disclose the percentages of diversity on the board and senior management. The bill contains a provision that requires boards to comply with standards for diversity or be able to explain their decisions for not pursuing a diverse board. The section of the bill that pertains to diversity is similar to securities regulations at the provincial level.

Concluding Thoughts on C-25 from the Critics

While C-25 enjoys strong support nationally, like any landmark legislation, the new bill has a few critics. Advocates with an eye on corporate governance express minor concerns that certain aspects of the bill are too vague. The broadness of the bill allows for some flexibility, which may be needed to accommodate the size and uniqueness of the corporations it serves. Critics offer mild arguments that the bill may be vague enough that it would make it difficult for the government to monitor and oversee it. Still other critics are expressing concerns that it's not necessary for Members of Parliament to codify such measures, and rather, they should be left up to regulators. Perhaps this is why it has taken so long for Parliament to bring these matters to a vote.

There is no argument that the changes that C-25 would create are good ones. By and large, those who work and network with people and corporations in the securities industry are hopeful that C-25 will soon become law.
Related Insights
Nicholas J. Price
Nicholas J. Price is a former Manager at Diligent. He has worked extensively in the governance space, particularly on the key governance technologies that can support leadership with the visibility, data and operating capabilities for more effective decision-making.