For corporate governance process-related matters, in addition to the legislative requirements under applicable statutes (e.g., Bank Act, Insurance Companies Act), federally regulated financial institutions in Canada are also required to follow the Corporate Governance Guideline issued by their federal financial regulator, namely Office of the Superintendent of Financial Institutions (OSFI).

On November 7, 2017, OSFI issued for comments changes to its Corporate Governance Guideline. The comments are due by December 22, 2017. OSFI expects to issue the final guideline in spring 2018, along with a non-attributed summary of comments received and OSFI’s response.

In its cover letter relating to the draft guideline, OSFI has indicated that, since its announcement of its intention to review this guideline last year, OSFI engaged with boards and executives to seek their feedback. That feedback, combined with OSFI’s own research and observations, is reflected in the draft that is now released.

Key changes

A side-by-side comparison of the draft guideline with the existing guideline does not reveal a complete rewrite but rather incremental changes (although the reorganization of certain sections within the guideline may give the impression of material changes).

In OSFI’s view, the key changes include:

  • providing boards with greater discretion on how they meet the principles of the Corporate Governance Guideline, taking into account the financial institution’s size, nature of operations and risk profile;
  • a clearer delineation of board and senior management responsibilities across the financial institutions; and
  • consolidation and rationalization of board requirements into one place.

Arguably, the points noted above are mostly addressed in the existing guideline. However, the revised guideline does a better job of organizing and consolidating the information with some incremental improvements.

The revised guideline also introduces certain new elements, including the following:

  • In a couple of areas, the revised guideline states that the boards should provide “challenge” or “constructive challenge” to the senior management of the company.
  • In respect of board effectiveness, the revised guideline adds “proactiveness” as one of the hallmarks of an effective board.
  • The revised guideline states that “diversity” should be a factor in the board renewal or succession plans. The revised guideline does not include any specific requirements for diversity. This flexibility would likely be appreciated by the boards.
  • The guideline states that, in assessing the effectiveness of a company’s corporate governance process, “OSFI will look to gain insight into the discussions and deliberations at the Board and Committee level, including those with and without Senior Management. This may include understanding the Board’s behaviour and assessing the objectivity, degree of challenge and independence in the decision making process.”
  • In respect of changes to the board or senior management, the revised guideline states that the process and criteria used by the company in the selection process for board and/or senior management members should be transparent to OSFI. Information regarding the expertise and character of candidates of the board and senior management should be provided to OSFI.

OSFI already has broad powers and mandates under the federal financial statutes that would give OSFI the authority to assess and review the corporate governance practices and processes of financial institutions. The changes to the guideline are not meant to give OSFI broader powers, but rather to serve as a guideline to the financial institutions on OSFI’s expectations. Given the corporate governance weaknesses revealed by the Wells Fargo scandal in the United States, perhaps it is not surprising that OSFI wishes to raise its expectations and avoid a similar scandal in Canada.