The Canadian Securities Administrators ("CSA") has proposed a revised corporate governance practice and disclosure regime. This proposal would repeal and replace the following policy and instruments:
- National Policy 58-201 – Corporate Governance Guidelines (as proposed, the "Proposed CG Principles")
- National Instrument 58-101 – Disclosure of Corporate Governance Practices (as proposed, the "Proposed CG Disclosure Rule")
- National Instrument 52-110 – Audit Committees and Companion Policy 52-110CP– Audit Committees (as proposed, the "Proposed Audit Committee Rule")
The Proposed CG Principles are more principles-based and broader than the current corporate governance guidelines. They contain nine broad corporate governance principles and commentary explaining the principles, as well as examples of corporate governance practices that can be used to achieve the objectives of the principles.
The CSA indicates that through the Proposed CG Disclosure Rule, the existing "comply or explain" model of applicable disclosure requirements would be replaced with more general disclosure requirements, that would apply to both venture and non-venture issuers.
Additionally, the current rules-based approach to determining director and audit committee independence would be replaced by a principles-based approach – the bright-line tests for independence would be replaced by a principles-based definition along with guidance on the types of relationships that could affect a director's independence.
This reformulation was undertaken by the CSA partly in response to the fact that the Canadian market has a large number of small issuers and controlled issuers. While the Alberta Securities Commission supports the objectives of the new proposals, it is concerned that the new rules will not substantially improve upon the current rules.
When it first published the final form of the current corporate governance rules and policy, the CSA acknowledged that corporate governance was constantly evolving. Since that time, the CSA carried out a broad review of the corporate governance rules and policy, and it examined corporate governance regimes in other jurisdictions and considered the realities of the large number of small issuers and controlled issuers in the Canadian market. Through the Proposed CG Principles, the Proposed CG Disclosure Rule and the Proposed Audit Committee Rule, the CSA aims to provide guidance to issuers, greater transparency to the marketplace and a framework for strong, effective and independent audit committees.
The Proposed CG Principles, Proposed CG Disclosure Rules and Proposed Audit Committee Rules, as proposed, are open for comment until April 20, 2009, and the CSA intends to give issuers six months notice before the new rules take effect.
Proposed CG Principles
The nine principles under the Proposed CG Principles do not create obligatory practices or minimum requirements. The CSA recognizes that other corporate governance practices achieve similar objectives, corporate governance evolves as an issuer's circumstances change, and issuers should have flexibility to determine the practices appropriate for their circumstances. Following is an outline of the principles, together with some commentary provided by the CSA in the Proposed CG Principles:
Principle 1: Create a Framework for Oversight and Accountability
An issuer should establish the respective roles and responsibilities of the board and executive officers.
The rationale for defining such responsibilities is to promote accountability to the issuer and its shareholders. The division of responsibilities will depend on the size, complexity and ownership structure of the issuer. In general, it is the board that is responsible for setting the issuer's overall vision and long-term direction, and the executive officers' role is to develop and implement an appropriate strategy that meets such vision and direction.
Principle 2: Structure the Board to Add Value
The board should be comprised of directors who will contribute to its effectiveness.
The CSA indicates that an effective board is structured such that it allows directors to fully and effectively carry out their fiduciary duties, and add value to the issuer with a view to its best interests.
Principle 3: 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.
While the responsibility for selecting and appointing directors rests with the board, a board nomination committee could facilitate the process. Smaller boards may not need a formal committee.
Principle 4: Continuously Strive to Improve the Board's Performance
A board should have processes to improve its performance and that of its committees, if any, and individual directors.
The board should provide comprehensive orientation and continuing education that covers the issuer and its business, financial condition, operations and risk-management practices, as well as its industry and competitive position.
Principle 5: Promote Integrity
An issuer should actively promote ethical and responsible behaviour and decision-making.
The board has a responsibility to set ethical standards applicable to the issuer's directors, executive officers and employees.
Principle 6: Recognize and Manage Conflicts of Interest
An issuer should establish a sound system of oversight and management of actual and potential conflicts of interest.
This can be accomplished through establishing an ad hoc or standing committee to identify, review, report and record actual or potential conflicts of interest. Additionally, obtaining independent advice on the situation related to the actual or potential conflict of interest can be important. Further, where an ad hoc or standing committing for conflicts of interest has been established, such a committee should be composed of directors who are not interested in any matter being discussed or considered and have terms of reference and provide it with the authority to engage and compensate any internal or external advisor.
Principle 7: Recognize and Manage Risk
An issuer should establish a sound framework of risk oversight and management.
Risk oversight and management includes the culture, processes and structures that are directed towards taking advantage of potential opportunities while managing potential adverse effects. Risk oversight and management should focus on identifying the most significant areas of exposure that could have an adverse impact on the achievement of the issuer's goals and objectives.
Principle 8: Compensate Appropriately
An issuer should ensure that compensation policies align with the best interests of the issuer.
Compensation should be set and structured to attract and retain executive officers and directors and motivate them to act in the best interests of the issuer, and that this includes a balanced pursuit of short- and long-term objectives.
Principle 9: 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.
The board should promote a voting process that is understandable, transparent and robust and that facilitates the board obtaining meaningful information on shareholder views.
Proposed CG Disclosure Rule The Proposed CG Disclosure Rule provides one disclosure regime for both venture and non-venture issuers. Under this rule, issuers would be required to disclose the practices it uses to achieve the objectives of the nine principles set out in the Proposed CG Principles and disclose certain factual information, such as the board's composition and information about any of its committees. This is a departure from the current corporate governance disclosure requirements, which require issuers to "disclose whether or not…" they complied with the current corporate governance guidelines and, if not, explain why they have not.
The Proposed CG Disclosure Rule requires issuers to describe many aspects of its governance structure. Issuers should refer to the full text of the Proposed CG Disclosure Rule for a full list of the matters to be described.
Proposed Audit Committee Rule
The current audit committee independence standard is based on the "no direct or indirect material relationship" standard, and there is a list of relationships that are deemed to constitute "material relationships." Under the Proposed Audit Committee Rule, a director is independent if he or she:
(a) is not an employee or executive officer of the issuer; and
(b) 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.
Under this definition, employees and executive officers of the issuer could never be considered independent. Also, while a control person or significant shareholder would not be disqualified from being independent, when assessing independence, boards would need to 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, this relationship may be reasonably perceived to interfere with the exercise of independent judgment.
The CSA believes the concept of perception is broader than that of expectation, and the proposed definition captures relationships that are reasonably perceived to interfere with the exercise of independent judgment, while the current definition captures relationships that are reasonably expected to interfere with the exercise of independent judgment.
The CSA has also included guidance in the proposed companion policy for assessing independence, and the determination of independence is left to the reasonable judgment of the board. The new definition would apply to all directors, not just audit committee members. The CSA also proposes two forms of transitional relief for the requirement that all audit committee members be independent. The first would apply when venture issuers become non-venture issuers, and the second would apply in the context of a reverse takeover when the acquirer is either a venture issuer or a non-reporting issuer.
The CSA proposes to remove exemptions for controlled issuers in light of the new approach to independence, and it also proposes to amend the temporary exemption from the requirement that all audit committee members be independent for limited and exceptional circumstances by removing the condition that the board determine, in its reasonable judgment, that the audit committee member relying on this exemption is able to exercise the impartial judgment necessary to fulfill his or her responsibilities. Instead, the exemption would not apply to an audit committee member unless the board determined that the reliance on the exemption will not significantly adversely affect, among other things, the ability of the audit committee to act independently.