The Canadian Securities Administrators (the CSA) is seeking comments on its consultation paper: CSA Consultation Paper 52-404 Approach to Director and Audit Committee Member Independence (the Consultation Paper). The Consultation Paper intends to facilitate a discussion on the appropriateness of the CSA's approach to determining Director and Audit Committee Member Independence.1 The deadline to submit comments is quickly approaching; the CSA must receive all comments by January 25, 2018.

National Instrument 52-110 (NI 52-110) prescribes the current approach to determining director and audit committee member independence. It states that directors and audit committee members must not have a direct or indirect material relationship with the issuer.2 NI 52-110 defines material relationships as relationships "which could, in the view of the issuer's board of directors, be reasonably expected to interfere with the exercise of a member's independent judgment."3 Notwithstanding this definition, the instrument establishes bright-line rules by deeming certain relationships to be material relationships. These relationships include, inter alia, individuals who are, or have been within the last three years, employees or executive officers of the issuer.4

Stakeholders have criticized the CSA's approach, and particularly the existence of these bright-line rules. These critics argue that the CSA's approach is inflexible and overly-restrictive. They point to other jurisdictions, such as Australia and Sweden, and argue that a more flexible approach should be permitted. Unlike Canada, Australia and Sweden have not established bright-line rules. Alternatively, these jurisdictions provide a definition of independence and supplement it with guidance.

The Canadian approach does have certain advantages. While the bright-line rules may be inflexible and restrictive, they offer stakeholders an unparalleled level of certainty; determining whether a relationship falls within a pre-defined category is easier than using one's judgment to analyze independence.

Regardless of your position, director and audit committee independence is an important part of corporate governance and is an issue which affects numerous stakeholders. Evidently, the method one uses to determine director and audit committee member independence is of great significance. Interested parties should not miss the opportunity to comment on the Consultation Paper.

The author would like to thank Fahad Diwan, articling student, for his contribution to this article.

Footnotes

[1] CSA Consultation Paper 52-404: Approach to Director and Audit Committee Member Independence, at p. 2.

[2] Subsection 1.4(1) of National Instrument 52-110.

[3] Subsection 1.4(1) of National Instrument 52-110.

[4] Subsection 1.4(3) of National Instrument 52-110.

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