Under Canadian corporate law, directors have a fiduciary role as they have a duty to act in the best interests of the corporation they serve and to exercise their powers in good faith. This duty is not owed by the directors to the shareholders or other stakeholders exclusively, however, as directors need to be cognizant that a fundamental component of good corporate governance is being able to evidence to the corporation’s shareholders and other stakeholders, such as investment funds, retail investors, rating agencies, research analysts, proxy advisory firms, customers, and the media, that the corporation is being appropriately managed. In particular, shareholders and other stakeholder groups now have heightened expectations on corporations to be both transparent and accountable in their disclosure relating to environmental, social, and governance (ESG) issues and policies, including monitoring and reporting against key performance indicators (both financial and non-financial) which measure the corporation’s ESG performance.
Corporations that elicit, consider, and are responsive to the expectations of their shareholders and other stakeholders in the development of their ESG policies and disclosure practices are more likely to attract investors and obtain capital at a lower cost than their competitors in the same industry or asset class that either fail to do so or fall below expectations. Directors should also be keenly aware that whether or not they receive sufficient votes to be elected or re-elected during annual general meeting season is becoming increasingly dependent on how the corporation is assessed by proxy advisory firms in the category of risk oversight.
For example, on November 12, 2020, Institutional Shareholder Services (ISS), the world’s largest proxy advisory firm, announced its proxy voting guidelines updates for Canada for public company shareholder meetings taking place on or after February 1, 2021, and introduced ESG issues as part of their overall risk oversight for the first time. Historically, ISS’s examples of failure of risk oversight included bribery, reprimands from regulatory bodies, adverse legal judgments or settlements, or hedging of company stock. In ISS’s 2021 guidelines, ISS recommends voting against or withholding votes from individual directors, committees, or the entire board, under extraordinary circumstances, when there have been material failures of governance, stewardship, risk oversight, or fiduciary responsibilities at the company. ISS has also added “demonstrably poor risk oversight of environmental and social issues, including climate change” to its list of examples of failure of risk oversight.
In the past year, we have seen the social conscience of Canadian corporations garnering increased scrutiny. Both public and private corporations are being called upon to adopt gender diversity policies that include targets with specific timelines for increased female representation on the board of directors and in executive officer positions. In its 2021 report, the Canadian Securities Administrators (CSA), an umbrella organization of Canada’s provincial and territorial securities regulators, noted that 26% of issuers adopted targets for the representation of women on their boards, and 4% adopted targets for the representation of women in executive officer positions. In that same report, the CSA noted that 79% of issuers had at least one woman on their board and 65% had at least one woman in an executive officer position. Although mining companies still have room to grow with respect to the representation of women in the boardroom, the CSA report reveals that while in 2015 only 35% of mining companies had at least one female board member, in 2020 this has increased to 72%, representing one of the largest improvements based on the industries studied over the same six-year timeframe.
Non-gender based diversity is also paramount to evidencing good corporate governance, and corporations should also be developing policies that include targets for the representation of persons with disabilities, Indigenous peoples, and visible minorities. As of January 1, 2020, the Canadian Business Corporations Act began requiring that each distributing (i.e. public) federally incorporated company either disclose information about its policies and targets for the representation of designated diversity groups, or explain why it does not have a policy and targets. These designated diversity groups include women, persons with disabilities, Indigenous peoples, and visible minorities.
The required disclosure includes:
- Whether the company has adopted term limits or other mechanisms of board renewal and, if so, a description of those mechanisms;
- Whether the company has written policies relating to the identification and nomination of directors from the designated diversity groups and, if so, a description of those policies;
- Whether and, if so, how the company’s board or nominating committee considers diversity on the board in identifying and nominating candidates for election or re-election to the board;
- Whether and, if so, how the company considers the level of representation of the designated diversity groups when appointing members of senior management;
- Whether the company has targets for representation on the board and among senior management for each of the designated diversity groups by a specific date and, if so, the company’s progress in achieving those targets; and
- The number and proportion of members from each of the designated diversity groups on the board of directors and among senior management.
While the CBCA diversity disclosure requirements do not apply to private corporations, directors of private corporations seeking investors (whether by way of private placement, venture capital, or private equity investment) or who are considering a sale transaction, including a going public transaction, should be equally mindful of the importance of establishing specific and measurable ESG goals and objectives in the management of the business. Increasing weight is also being placed on non-financial ESG factors in valuations and pricing multiples for private corporations as well as public corporations, and that trend is expected to continue.
Canadian companies from a variety of industries have begun setting targets and disclosing their progress with respect to these non-financial ESG factors. An example of where this is taking place includes companies’ disclosing their targets to become carbon neutral by a certain year and their annual progress to reach their goal. Canadian companies are also disclosing their use of internal diversity committees to implement diversity initiatives and training programs to foster acts of inclusion
In terms of a specific, real world example of how a company is navigating increased expectations with respect to diversity disclosure, the shareholders of TMX Group Limited, which owns the Toronto Stock Exchange, recently voted in favour of a board-supported proposal which would require its board of directors to disclose the company’s efforts regarding the company’s inclusion of Indigenous peoples. This represents the first time an Indigenous reconciliation or diversity proposal has ever been jointly endorsed by the board of directors and shareholders of a Canadian company. Specifically, TMX Group will now report on its work to develop policies regarding Indigenous employees and relationships with Indigenous communities, its work to review procurement from Indigenous-owned businesses, and its engagement with Indigenous organizations. The Shareholder Association for Research & Education (SHARE), a non-profit organization which assisted in the foregoing proposal, provided that TMX Group’s position illustrates that prioritizing and setting clear objectives related to reconciliation and Indigenous economic advancement is a best practice within the financial sector.
To achieve both gender and non-gender diversity targets, there is an increasing trend among corporations to create and establish diversity and inclusion committees of the board of directors, partner with female and BIPOC (black, Indigenous and people of color) organizations to seek out director candidates as part of the board recruitment process, develop diversity and training programs at all levels of the organization, offer leadership training to support the development and advancement of women, and amend executive compensation programs so that a material component of an executive’s remuneration is based on the corporation achieving its diversity targets that include both specific and measurable objectives.
With increasingly greater value and scrutiny being placed on ESG disclosure and performance by shareholders, investors and other stakeholder groups, boards of directors that establish and publish written diversity policies, set specific diversity targets and timelines, regularly monitor and report on the results to the diversity targets, and tie a material percentage of executive compensation to the “S“ (social conscience) in ESG should evidence to these stakeholder groups that a transparent and accountable corporate governance structure has been established, which should, in turn, result in higher rankings than their competitors in the categories of governance, stewardship, and risk oversight and a sustainable competitive advantage in the long term.
 “Proxy Voting Guidelines for TSX-Listed Companies Benchmark Policy Recommendations” (19 November 2020) at 16, online (pdf): ISS <issgovernance.com/file/policy/active/americas/Canada-TSX-Voting-Guidelines.pdf>.
 “CSA Multilateral Staff Notice 58-312 Report on Sixth Staff Review of Disclosure Regarding Women on Boards and in Executive Officer Positions (10 March 2021) at 1, 7, online: Ontario Securities Commission <osc.ca/sites/default/files/2021-03/sn_20210310_58-312_staff-review-women-on-boards.pdf>.
 Canada Business Corporations Act, RSC 1985, c C-44, s 172.1; Canada Business Corporations Regulations, 2001, SOR/2001-512, s 72.2; Employment Equity Act, SC 1995, c 44, s 3; “Dentons 2020 proxy season update” (21 January 2020), online: Dentons <dentons.com/en/insights/alerts/2020/january/21/dentons-2020-proxy-season-update>.
 “Press Release: TMX Group Limited shareholders vote in favour of company-supported shareholder proposal on Indigenous inclusion” (12 May 2021), online: SHARE <share.ca/press-release-tmx-vote-reconcilation/>; “TMX Group Announces Support of Amended Shareholder Proposal” (22 April 2021), online: TMX <tsx.com/news?id=827&year=2021>; “TMX management joins Canadian businesses committing to Indigenous economic empowerment” (22 April 2021), online: SHARE <share.ca/tmx-management-joins-canadian-businesses-committing-to-indigenous-economic-empowerment/?utm_source=rss&utm_medium=rss&utm_campaign=tmx-management-joins-canadian-businesses-committing-to-indigenous-economic-empowerment>
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