On October 26, 2017, the Canadian Securities Administrators published for comment CSA Consultation Paper 52-404 – Approach to Director and Audit Committee Member Independence. The paper is intended to facilitate a broad discussion and solicit views on the current approach to determining director and audit committee member independence.
On October 26, 2017, the Canadian Securities Administrators (“CSA”) published CSA Consultation Paper 52-404 Approach to Director and Audit Committee Member Independence (the “Paper”). The Paper is intended to solicit views on the appropriateness of the CSA’s current approach to determining director and audit committee member independence. Interested parties have until January 25, 2018 to submit their views. The CSA will consider these views in assessing whether or not any changes should be made in determining who is and who is not independent under Canadian securities rules.
The Paper represents the first time since 2008/2009 that the CSA has opened up a discussion on director and audit committee member independence.
The CSA’s current approach is set out in National Instrument 52-110 Audit Committees (“NI 52-110”) and includes:
- A definition of independence that is subjective – a person is independent if he or she has no direct or indirect material relationship with the issuer, with a material relationship being one which could, in the view of the issuer’s board of directors, be reasonably expected to interfere with the exercise of that person’s independent judgement.
- Bright line tests that preclude certain directors or audit committee members from being considered independent.
- Additional bright line tests that relate specifically to the independence of an audit committee member.
The approach must also be considered in light of applicable stock exchange requirements.
Determining independence is central to the Canadian corporate governance regime in a number of respects, including under the “comply or explain” disclosure model prescribed by National Policy 58-201 Corporate Governance Guidelines and National Instrument 58-201 Disclosure of Corporate Governance Practices. These require issuers to have a board comprised of a majority of independent directors or, if they do not, disclose what the board does to facilitate the exercise of independent judgment in carrying out is responsibilities. Similarly, NI 52-110 generally requires that audit committees be comprised solely of independent members.
Critics of the current Canadian regime argue that the approach to determining independence is inflexible because it does not permit a board to exercise judgment in the event one of the bright-line tests has been triggered and may result in a determination of independence that does not accord with the more nuanced views of the board. This may in turn limit the pool of qualified candidates available to serve as independent directors or audit committee members.
The decisions of the CSA following closure of the comment period on January 25, 2018 should be of interest to all stakeholders.