The Canadian Securities Administrators (CSA) recently published for comment proposed amendments to the CSA’s corporate governance and audit committee regimes for Canadian issuers. The CSA have invited comments on their proposals by April 20, 2009.
The proposed regimes would introduce principles-oriented changes in three main areas:
- National Policy 58-201 Corporate Governance Principles would be a more principles-based policy that is broader than the current policy.
- National Instrument 58-101 Disclosure of Corporate Governance Practices would be amended such that more general disclosure requirements would replace the existing "comply-or-explain" disclosure model.
- National Instrument 52-110 Audit Committees and its related companion policy would be revised such that a principles-based approach to determining director and audit committee member independence would replace the current approach.
Proposed Governance Policy
The proposed Governance Policy articulates nine core corporate governance principles that apply to all issuers and that a board should consider in developing their corporate governance structure and practices — and in respect of which disclosure will be required.
The nine core corporate governance principles are:
- Create a framework for oversight and accountability. An issuer should establish the respective roles and responsibilities of the board and executive officers.
- Structure the board to add value. The board should comprise directors who will contribute to its effectiveness.
- Attract and retain effective directors. A board should have processes to examine its membership to ensure that directors, individually and collectively, have the necessary competencies and other attributes.
- Continuously strive to improve the board’s performance. A board should have processes to improve its performance, as well as that of its committees, if any, and individual directors.
- Promote integrity. An issuer should actively promote ethical and responsible behaviour and decision-making.
- Recognize and manage conflicts of interest. An issuer should establish a sound system of oversight and management of actual and potential conflicts of interest.
- Recognize and manage risk. An issuer should establish a sound framework of risk oversight and management.
- Compensate appropriately. An issuer should ensure that compensation policies align with the best interests of the issuer.
- Engage effectively with shareholders. The board should endeavour to stay informed of shareholders’ views through the shareholder meeting process as well as through ongoing dialogue.
Each principle is accompanied by commentary that provides relevant background and explanation, along with examples of practices that could achieve its objectives. These examples are not meant to create obligatory practices or minimum requirements. While the CSA encourage issuers to consider the commentary and examples when developing their own corporate governance practices, the regulators recognize that: (a) other corporate governance practices could achieve the same objectives of the principles; (b) corporate governance evolves as an issuer’s circumstances change; and (c) each issuer should have the flexibility to determine the appropriate corporate governance practices for its circumstances.
Proposed Governance Disclosure Instrument
Under the proposed Governance Disclosure Instrument and the revised Form 58-101F1, each issuer will be required to disclosure the practices it uses to achieve the objectives of each principle set out in the proposed Governance Policy. An issuer will also be required to disclose certain factual information such as the composition, roles and responsibilities of the board and each standing committee, as well as the terms of any written mandate or formal board or committee charter.
The proposed set of disclosure requirements are more general in nature and more flexible than the current requirements, which are based on a "comply-or-explain" model and will apply to both venture issuers and non-venture issuers, as well as debt-only issuers. The new disclosure requirements will not apply to subsidiary entities who do not have equity securities (other than non-convertible, non-participating preferred securities) trading on a marketplace, and whose parent complies with the Governance Disclosure Instrument.
Issuers will no longer be required to file a copy of their code of business conduct and ethics or an amendment to the code through the System for Electronic Document Analysis and Retrieval (SEDAR). However, an issuer will be required to provide a summary of any standards of ethical and responsible behaviour and decision-making or code adopted by the issuer and to describe how to obtain a copy of its code, if any.
Proposed Audit Committee Instrument and Policy
The proposed Audit Committee Instrument requires that all audit committee members of all non-venture issuers must be independent, and provides that a director is independent if he or she:
- is not an employee or executive officer of the issuer; and
- does not have, or has not had, any relationship with the issuer, or an executive officer of the issuer, which could, in the view of the issuer’s board of directors having regard to all relevant circumstances, be reasonably perceived to interfere with the exercise of his or her independent judgment.
This approach differs from the current approach to independence in several respects.
The proposed definition of independence focuses on independence from the issuer and its management. In explicitly stating that an employee or executive officer is not independent for the purposes of any board or committee director position, the CSA draw on the basic corporate law principle that a board of directors has an obligation to supervise the management of the business and affairs of an issuer. This is the only explicit restriction on eligibility for independence as a director in the proposed new approach to independence.
It is also notable that the proposed definition captures relationships with the issuer, or an executive officer of the issuer, which could be reasonably perceived to interfere with the exercise of independent judgment, whereas the current definition captures relationships that are reasonably expected to interfere with the exercise of independent judgment. This altered approach will broaden the considerations to be applied by the board of directors in making its determination of the independence of a director.
The proposed Audit Committee Companion Policy provides guidance for assessing an individual’s independence in the form of a non-exhaustive list of relationships that could affect such independence. This is a significant change from the current Audit Committee Instrument, which sets forth specific relationships that automatically disqualify directors from being considered to be independent.
The CSA note that the proposed Audit Committee Instrument does not disqualify a control person or a significant shareholder from being independent, but point out that, when making independence assessments, boards should consider the control person’s or significant shareholder’s involvement with the management of the issuer — and, depending on the nature and degree of involvement, should consider whether this relationship may reasonably be perceived to interfere with the exercise of independent judgment.
It is noted in the proposed Audit Committee Instrument that disclosure of information regarding director independence is required under the proposed Governance Disclosure Instrument. This includes disclosure of which directors are considered by the board to be independent, any relationship with the issuer or any of its executive officers that was considered by the board in determining the director’s independence — and, if there is any such relationship, why the board considers the director to be independent. Furthermore, disclosure is required as to which directors are considered by the board to be not independent and the basis for that determination.
Rules or Principles?
Many of the current corporate governance rules were introduced six to seven years ago in the United States in response to certain large-scale corporate failures, such as Enron and WorldCom, and were adopted four to five years ago in Canada in order to ensure that issuers in Canada were subject to comparable oversight as registrants in the United States. Some issuers and observers were critical of the corporate governance and audit committee regimes that were introduced in Canada, citing concerns that the requirements were not appropriate for many issuers in the Canadian market, where there are many controlled issuers and small public companies. While the regulators acknowledged that corporate governance is in a constant state of evolution, some participants questioned whether the governance pendulum had swung too far under the current instruments and policies.
The proposed changes in the corporate governance and audit committee regimes for issuers in Canada reflect some recognition by some of the regulators that there is a need in Canada for a less rules-dominated, more principles-based approach to corporate governance and audit committee matters. This principles-based approach is a significant departure from the rules-based approach that was implemented in the United States under The Sarbanes-Oxley Act of 2002 and that was adopted by the CSA four to five years ago.