Further changes may be on the horizon for public companies and their boards. While the CSA continues to look at issues such as board diversity, including projects relating to women on boards and in executive officer positions, the CSA is also looking at the meaning of independence with respect to board and audit committee positions. In the recent CSA Consultation Paper 52-404 Approach to Director and Audit Committee Member Independence (the “Consultation Paper”), the CSA confirmed that it is re-examining its approach to independence.

Current rules involve a determination by a non-investment fund reporting issuer whether a member of its board or audit committee is independent based on a subjective definition, which is then supplemented by bright-line tests.  In other words, a board has to first determine if an individual is independent based on whether they have a direct or indirect material relationship with the issuer. This direct or indirect material relationship would be any relationship which, in the view of the board, could be reasonably expected to interfere with the exercise of a member’s independent judgement. If the subjective test is met (i.e. there is no such relationship), then the bright-line tests found in National Instrument 52-110 Audit Committees must be applied, which would automatically disqualify someone from being an independent board member or audit committee member.  Some examples of situations where an individual would be disqualified under the current rules, notwithstanding any other decision of independence by the board, include persons who have been employees or executive officers of the issuer within the last three years. Additional bright-line tests exist which relate specifically to the independence of an audit committee member.

Detractors from the current rules have said that there is not enough discretion or flexibility for boards to determine that a different conclusion may be warranted in the circumstances where the individual has the requisite judgment and expertise to serve, but are prohibited from doing so because of the bright-line tests.  In the Consultation Paper, the CSA reviews the approach taken in other jurisdictions and asks various questions about the Canadian approach and alternatives.