Canadian Governance Diversity Disclosure Obligations: Get On Board

Updated November 21, 2024.

The rapid adoption of ESG (Environment, Social and Governance) principles and the growth of mandatory disclosure legislation is driving more public and private corporations (and their stakeholders) to assess and address the diversity in their leadership and throughout their organization. But while women are making more progress than other underrepresented groups, current representation on boards and senior management is still a long way from reflecting the diversity of Canada's available workforce.

Federal Government Action. The Canadian government has taken a number of steps intended to indicate its commitment to diversity and inclusion in Canada:

• In 2018, the Government of Canada effected the Canadian Gender Budgeting Act intended to embed gender equality and fairness and inclusion considerations as a core focus of the annual federal budget and are accounted for in all taxation and resource allocation decisions. The Budget 2024 Statement and Impacts Report on Gender, Equality, Diversity and Quality of Life outlines the Governments current efforts.

• In 2019, the Government appointed the first Minister of Diversity and Inclusion and Youth, which has since evolved into the Minister of Diversity, Inclusion and Persons with Disabilities.

• In 2020, the Government joined business and diversity organizations to launch the 50 – 30 Challenge asking organizations aspire to gender parity (50%) and significant representation (30%) of other under-represented groups on Canadian boards and in senior management. 2,593 organizations are participating as of July 3, 2024.

Legal Disclosure Requirements. Canadian law reflects this carrot versus stick approach to addressing diversity on Canadian boards and in senior management. Some international jurisdictions are implementing a "quota" approach to boost board and management diversity. For example, on November 22, 2022, the European Union adopted a "Women on Boards" Directive that establishes a goal of at least 40% of non-executive director posts or 33% of all director posts be occupied by the under-represented sex by June 30, 2026. However, current diversity requirements in Canadian law are limited to the implementation of disclosure obligations. Disclosure obligations don't dictate a diversity quota to the corporations subject to them, but they do make the diversity of a corporation's governance and leadership team transparent to stakeholders. These stakeholders comprise of actual and potential investors, an increasing number of which, along with proxy advisory firms Institutional Shareholder Services (ISS) and Glass Lewis, include diversity practices and reporting compliance as key criteria in their proxy voting advice and guidelines.

Private Sector Opportunities. Many private entities have also taken this opportunity to reflect on their diversity and inclusion practices with renewed pledges and passion to break down barriers. Corporate governance diversity disclosure requirements offer a starting point to increase representation on boards and in senior management. Data compiled on gender diversity reporting obligations suggests those corporations that have implemented key mechanisms achieved more success than those that have not.

Here's a snapshot of the two key Canadian corporate governance diversity reporting obligations and how they have impacted corporate governance in Canada to date.

Non-Venture Reporting Issuers

Amendments to National Instrument 58-101 Disclosure of Corporate Governance Practices imposed six new disclosure obligations specifically related to women on boards and in senior management of non-venture reporting issuers intended to "increase transparency for investors and other stakeholders regarding the representation of women on boards and in senior management of non-venture issuers ... to assist investors when making investment and voting decisions."

Application. The amendments to NI 58-101 apply to all non-venture issuers reporting in every Canadian province and territory except B.C. and P.E.I.

"Diversity". The "diversity" non-venture reporting issuers must disclose is limited to women – as opposed to broader definitions of "gender".

Disclosure Details. Issuers subject to the women diversity reporting obligations must disclose this information in the proxy circular or the annual information form filed following its financial year:

• Policy. Whether the issuer has a written policy relating to the identification and nomination of women directors. If it doesn't have a policy, it must explain why it hasn't created one. If it does have a policy, it must summarize:

• • The policy's objectives and key provisions.
  • The measures the issuer has taken to ensure it has effectively implemented the policy.
  • The issuer's annual and cumulative progress in achieving the policy's objectives.
  • Whether, and if so how, the board or nominating committee measures the policy's effectiveness.
• Board Candidates. Whether the issuer's board or nominating committee considers the level of representation of women on the board when it's identifying and nominating candidates for the board. If it doesn't consider this, it must explain why not.

• Senior Management Candidates. Whether the issuer's board or nominating committee considers the level of representation of women in senior management when it's identifying and nominating candidates for executive officer appointments. If it doesn't consider this, it must explain why not.

• Targets. Whether the issuer has adopted a target (either a number or percentage) for women directors and executive officers. If it has, it must disclose the target and the annual and cumulative progress it has made in achieving them. If it hasn't adopted one, it must explain why it did not.

• Representation. The number and percentage of the issuer's women directors and executive officers.

• Board Vacancies. Whether or not the issuer has adopted term limits for the directors on its board or other mechanisms of board renewal and if it hasn't, why not (the point being to make space available on boards for women to occupy).

Comply or Explain. These obligations follow a "comply or explain why" model. The securities regulators monitor circulars for compliance with all disclosure obligations, assessing both the robustness of the disclosure and the explanations for non-compliance.

Impact. As of December 2024, the diversity disclosure obligations will have been in effect for ten full proxy years. On October 30, 2024, the CSA issued its Review of Disclosure Regarding Women on Boards and in Executive Officer Positions Year 10 Report detailing trends based on a review sample of 574 of the 709 issuers subject to the disclosure requirements. The Report indicates that while progress, particularly on boards, continues, it's still slow going, especially in the C-Suite generally, and in the C-Suites of the Technology, Biotechnology and Oil & Gas sectors specifically:

• Board Seats. Women held a mere 29% of board seats up from 11% in year one, and only 8% had a woman board chair. When the disclosure requirements came into effect, 49% of issuers had at least one woman on their board. This has steadily increased to 90%. And 42% had three or more women on their board, a significant increase from a negligible 8% in year one and still rising.

• Executive Officers. While 72% of issuers had at least one woman in an executive officer position, only 5% had a woman CEO (no change from the preceding four years) and only 16% had a woman CFO (a decrease of 1% from year nine and a minimal increase from the 14% in year four).

The Report also suggests, however, that those corporations that have implemented the mechanisms they are required to disclose have achieved a higher level of gender diversity than those that have not:

• Targets. The number of issuers that have adopted targets for representation of women on their board has steadily risen from 7% in year one to 44% – a dramatic increase overall. Women held an average of 35% of the board seats of issuers that adopted board targets for women; women held an average of only 22% of the board seats of issuers that did not. In contrast, only 7% (up from 5% in year nine but still a negligible number) of issuers have adopted targets for women in executive officer positions. These numbers suggest that adoption of targets is an effective strategy to increase the number of women on boards – and likely in the C-Suite as well.

• Policies. 64% of issuers had adopted a written policy respecting the representation of women on their board. Women held an average of 33% of board seats of issuers that adopted a policy respecting the representation of women on their boards; women held an average of only 20% of board seats of issuers that did not. Again, this suggests the adoption of a written policy is also an effective strategy to increase the number of women on boards.

• Term Limits. 25% of issuers had adopted director term limits, minimal progress since the 19% in year one; of these, 32% adopted age limits only, 37% tenure limits only, and 31% both – signaling a trend toward tenure limits. Women held an average of 35% of board seats of issuers that have adopted term limits, versus 26% for issuers that have not, speaking to the effectiveness of a board renewal strategy to increase the number of women on boards. Yet on 37% of board vacancies were filled by women in year ten – up 17% over year one but down from 43% in year nine.

Proposed Amendments. In April 2023 the Canadian Securities Administrator (CSA) published a notice and request for comments on proposed amendments to National Instrument 58-101 Disclosure of Corporate Governance Practices (Form 58-101F1) and National Policy 58-201, Corporate Governance Guidelines (NP 58-201) that would expand non-venture reporting issuers' diversity reporting obligations and offer new guidance for the adoption of practices to enhance diversity – but in different ways.

• Flexible Option. Issuers would themselves define and disclose "identified groups" (other than women) meaningful to its diversity strategy and to design ways to achieve (or keep) director and executive officer diversity, in narrative form and, if it collects data on their directors and executive officers from its identified groups, disclose that information. National Policy 58-201 Corporate Governance Guidelines(NP 58-201) would be revised to include new guidance for adopting diversity practices: adopt a written diversity policy or alternatively a diversity "process"; set objectives for achieving, or regarding, diversity; and suggests different ways to achieve diversity objectives, including setting targets or the adoption of other diversity-related initiatives.

• Prescribed Option. Modelling the Canada Business Corporations Act (CBCA), reporting would be expanded to "designated groups" defined as women, racialized persons, Indigenous peoples, and persons with disabilities, but add LGBTS2SI+ persons. Issuers would be required to disclose targets and "designated groups" representation on its Board and in its C-Suite. Reporting would be based on voluntary self-disclosure. Issuers would disclose written board diversity strategies, policies and objectives in narrative form. Similar to the Flexible Option, National Policy 58-201 Corporate Governance Guidelines(NP 58-201) would be revised to include as guidance recommendations that the board:
  • Adopt a written diversity policy (with no alternative diversity "process").
  • Set objectives for achieving, or regarding, diversity.

This option, however, also states diversity objectives must be specific, measurable and time-bound. And it states a written board policy should also address:

• The ability to engage independent advisors to help identify candidates.
• Requiring advisors to present a diverse slate of candidates for consideration.
• The responsibility to consider any changes to the policy, board composition and recruitment process necessary to achieve the policy's objectives.
• A process to assess the effectiveness of the policy implementation.

• Nominating Committees. Both the Flexible and the Prescribed Options include new disclosure requirements and guidance for the board nomination process that increase its transparency and could encourage more members of underrepresented groups to offer as a board candidate.

• A Policy. Both would do away with the obligation to describe the nominating committee's responsibilities, powers and operation. Instead, issuers would disclose whether the board has a written nomination process policy, if not then explain how the board carries out the nomination process, and disclose:
  • How the board manages any conflicts of interest that do or could arise during the nomination process.
  • Whether it has a composition matrix setting out the board's current and desirable skills, knowledge, experience, competencies and attributes.
  • The skills, knowledge, experience, competencies and attributes of candidates it considers when evaluating a candidate.

• New Responsibilities. Amendments to NP 58-201 expressly assign new responsibilities to the nominating committee, including:
  • Board succession planning that should give a transparent process and timeline to replace board members to ensure the maintenance of the necessary skills, knowledge, experience, competencies and attributes, ensure a mix of both long serving and new directors.
  • Maintain the board's independence from management.
  • Director orientation and continuing education.

• New Guidance. The changes to NP 58-201 also provide additional guidance to nominating committees:
  • Have a regularly review a composition matrix setting out the mix of skills, knowledge, experience, competencies, attributes and independence the board currently has or is looking to achieve in its membership and use this review process to recruit new directors or provide existing directors with continuing education.
  • Adopt a written policy respecting the director nomination process setting out the board's process for director appointments and its approach to succession planning.
  • Base board appointments on objective criteria and consider whether a new nominee can devote sufficient time and resources to their board duties.

Public Corporations Under the Canada Business Corporations Act (CBCA)

On January 1, 2020, the mandatory director and senior management diversity reporting in Bill C-25, which the federal government introduced in 2016, finally kicked in. The CBCA amendments attempt to harmonize the corporate governance framework of federally-regulated corporations with that of their provincially-regulated counterparts and existing securities laws.

Application. The "prescribed corporations" to which the diversity disclosure apply are all distributing corporations. Notably, unlike similar existing requirements under securities laws, venture issuers aren't exempt from the CBCA diversity reporting obligation.

"Diversity". These diversity disclosure requirements are, so far, much more expansive than those required of non-venture reporting issuers, extending beyond gender to "designated groups". "Designated groups" is defined to include those "designated groups" under the Employment Equity Act, which include:

• Women
• Indigenous peoples.
• Persons with disabilities.
• Members of visible minorities.

Comply or Explain. Similar to the gender diversity reporting obligations applicable to non-venture reporting issuers, the CBCA model adopts a "comply or explain" model. While under the CBCA, an omission of diversity disclosure exposes the corporation and, potentially, officers and directors personally, to a fine up to $5,000.00 or to imprisonment for up to six months (or both), Corporations Canada's intent appears to also take a carrot versus stick approach, stating it will continue to "reach out" to "inform" and "remind" corporations of their disclosure obligations and "encourage" compliance. The threat of shareholder pressure, rather than the threat of punishment, might also motivate corporations to report on – and to increase – their diversity.

Disclosure. Corporations must provide this information at every annual meeting by including it in the notice or proxy circular:

• Policy. Whether the corporation has adopted a written policy relating to the identification and nomination of directors from designated groups, and if not, why. If a corporation has adopted a policy, the corporation must summarize:
  • The policy's objectives and key provisions.
  • The measures the issuer has taken to ensure it has effectively implemented the policy.
  • The issuer's annual and cumulative progress in achieving the policy's objectives.
  • Whether, and if so how, the board or nominating committee measures the policy's effectiveness.

• Director Candidates. Whether, and if so how, the corporation's board considers the level of designated group representation on the board in the identification and nomination of directors.
• Senior Management Candidates. Whether, and if so how, the corporation considers the level of designated group representation in senior management when making senior management appointments. The CBCA defines senior management members by reference to the definition of "executive officers" in National Instrument 51-102 – Continuous Disclosure Obligations, which includes the CEO, CFO, President, Chair, or any other individual who performs policy-making functions for the corporation.

• Targets. Whether the corporation has adopted a target or percentage of persons of designated groups to occupy board and senior management positions. If so, the target and the corporation's annual and cumulative progress in achieving that target; and if not, reasons why it wasn't.

• Representation. The number and proportion of persons of designated groups in director and senior management positions of the corporation.

• Board Renewal. Whether or not the corporation has adopted term limits for the directors on its board or other mechanisms of board renewal and if it hasn't, why not.

Guidelines. In February 2022, Corporations Canada (the government agency that administers the Canada Business Corporations Act) published Guidelines to encourage and help corporations to disclose their diversity information in a consistent manner. The intention is that corporations disclose information separately for directors and senior management roles and have an opportunity to disclose additional information that might be relevant to give stakeholders an accurate picture of the corporation's commitment to diversity in leadership.

Impact. In May 2024, Corporations Canada issued The Diversity of Boards of Directors and Senior Management of Federal Distributing Corporations – 2023 Annual Report, its fourth annual report respecting disclosure information. The findings suggest that about a quarter of corporations have diversity of all kinds on boards and in senior management on their minds, and presumably in their discussions, during selection processes. They also suggest those thoughts and conversations still haven't translated into actions – or results: women, Indigenous peoples, people with disabilities and members of visible minorities continue to be significantly under-represented on boards and in senior management positions of federal distributing corporations in Canada. The significant gain in the number of corporations considering diversity in the selections processes from year one does give reason for optimism, especially in light of the improved representation of women in leadership positions over the past seven years of gender diversity disclosure requirements for non-venture reporting issuers. However, the consistent reason for not adopting measures in key areas as "preventing the selection of qualified candidates" suggests continued opportunity for Corporations Canada to engage in conversations with corporations to better understand this hurdle and provide support to overcome it. It remains to be seen whether CBCA corporations, spurred by the diversity disclosure obligations and government supports, will further reflect on and take action to improve their corporate governance diversity and inclusion practices.

• Board Seats. 59% had at least one board seat held by women and 27% by visible minorities – an increase of 2% and 4% respectively. However, only 3% had at least one held by each of persons with disabilities and Indigenous peoples, though still a minor increase over the prior year. Women, visible minorities, persons with disabilities and Indigenous peoples cumulatively still held a total of only 28.2% of board seats, with 22% of those being held by women.
• Senior Management. Cumulatively, women, visible minorities, persons with disabilities and Indigenous peoples held 43% of positions in senior management teams of all reporting corporations, an increase of over 2%, with 29% of those being held by women and 13% by visible minorities.

• Targets. The numbers show that slightly fewer corporations than the prior year are (or say they are) thinking about diversity representation on their boards and in senior management: 69% (down 22%) of corporations said they consider the level of representation of women, 65% consider the level of representation of each of Indigenous peoples and of members of visible minorities, and 65% persons with disabilities, on the board when identifying and nominating candidates for election or re-election. However, those considerations have yet to evolve into hard targets. Only 22% (down 1%) adopted targets for the representation of women on their boards – and a mere 4% adopted targets for the representation of members of visible minorities, and 3% for each of Indigenous peoples and persons with disabilities, all virtually unchanged from the prior year. The same holds true for senior management representation: 64% of corporations said they consider the level of representation of women, and 61-62% (up a couple of points) consider the level of representation of each of Indigenous peoples, members of visible minorities and persons with disabilities among senior management when appointing members of senior management. But a mere 8% have adopted targets for the representation of women, and an average of 2% adopted targets for the representation of the other designated groups.
• Policy. 38% adopted written policies relating to the identification and nomination of women for directors. However, 35% of members of each of visible minorities, Indigenous peoples, and persons with disabilities for directors – all up slightly from last year. And a substantial difference in the policy adoption rate between venture and non-venture CBCA corporations still exists: non-venture issuers (which are also subject to the gender disclosure obligations) were almost six times (versus five times the prior year) more likely to adopt written policies than venture issuers.
• Board Renewal.Despite the growing number of corporations that said they consider underrepresented groups on the board when identifying and nominating candidates for election or re-election, and that adopted related written policies on point, only 16% actually adopted some formal mechanism for board renewal (age limits, tenure limits, or both) – a decrease of 1% since the last report.

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