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The Canadian Securities Administrators (the “CSA”) have published a 2010 corporate governance disclosure compliance review (the “Compliance Review”) which tracked the compliance of 72 reporting issuers with the disclosure requirements set out in National Instrument 58-101 – Disclosure of Corporate Governance Practice (“NI 58-101”). The 2010 Compliance Review follows on from the previously published 2007 compliance review on the same subject.
The CSA noted an unacceptable level of compliance with NI 58-101, citing that more than half of the issuers reviewed were required to make prospective improvements in respect of their corporate governance disclosure (this was up from 36% in the 2007 compliance review). Corporate governance disclosure continues to form an integral part of the CSA’s continuous disclosure review process and issuers and their advisors can expect that the results of the Compliance Review will lead to greater scrutiny of corporate governance disclosure with a view to improving the quality thereof.
The Compliance Review provides issuers and their counsel helpful guidance on corporate governance disclosure best practices. As with previous CSA staff notices in respect of continuous disclosure practices, the CSA takes the view that disclosure that does not adequately describe an issuer’s practices and language which constitutes “boilerplate” is insufficient to meet disclosure standards.
Issuers who are TSX-listed have an obligation to provide corporate governance disclosure as per Form 58-101F1. Venture issuers have a lower disclosure threshold to meet, the requirements of which are found in Form 58-101F2.
Outlined in turn below are a summary of the key areas of corporate governance disclosure that raised concern for the CSA. We urge issuers and their advisors to carefully read the full Compliance Review (linked to here) as it provides a complete discussion of common deficiencies, as well as very helpful examples of non-compliant disclosure along with commentary from the CSA on how such disclosure could have been improved. Also of great assistance to issuers in preparing their proxies will be the list of questions the CSA poses in respect of various corporate governance topics to assist in providing complete information to investors.
Board of Directors
A number of issuers canvassed for the Compliance Review did not adequately identify and discuss non-independent directors. Issuers are required to identify all non-independent directors as well as to disclose the material relationship that renders the director non-independent and how the board determined that such a material relationship exists.
Meetings of Independent Directors
The Compliance Review revealed that a number of issuers failed to disclose whether or not independent directors hold regularly scheduled meetings and, if they do not hold such meetings, to report on what the board does to facilitate open and candid discussion amongst independent directors.
Independent Chair and Independent Lead Director
Issuers have an obligation to describe what the board of directors does to provide leadership for independent directors if neither the chair nor the lead director are independent. Issuers who simply stated that their current independence structure is appropriate for the issuer failed to comply with this disclosure requirement.
A significant number of issuers were found not to have met the requirement to disclose whether they have written positions for the chair of the board and the chair of each board committee and whether they have a written position description for the Chief Executive Officer. Issuers should disclose the written positions and/or what the board does to delineate the responsibilities and roles of the chairs.
Orientation of New Directors and Continuing Education
Issuers should state in detail whether there is a formal orientation process for new directors and, in the event that there is such a process, describe the specific orientation activities. In the event that the issuer does not conduct formal orientation, it is not sufficient to simply state this fact, reasons should be given and these reasons should not include boilerplate. The same advice applies to disclosing any continuing education activities undertaken by the issuer.
Ethical Business Conduct
While issuers were found to generally comply with the obligation to disclose whether they have adopted a written code of business conduct and ethics and where to find the full text of such a code, a number of issuers failed to properly explain the mechanism by which the issuer monitors compliance with the code.
Nomination of Directors
The Compliance Review found significant disclosure deficiencies in respect of issuers identifying the process by which the board identifies new candidates for board nomination. Stating that a process for new candidate identification exists is insufficient. Information about the committee or individual in charge of such process and the details of the actual identification process are required, regardless of whether that process is formalized.
The method by which the board, board committees and individual directors are assessed with respect to effectiveness and contribution must be described. Failing such regular assessments, investors need to be told how the board satisfies itself that the board, committees and directors are performing effectively.
Board of Directors
Venture issuers are required to disclose how the board facilitates its exercise of independent supervision over management and, if the board has standing committees other than the audit committee, such issuers must identify such committees and describe their functions. As with several other areas of concern for the CSA, simply stating that a policy or committee exists without describing the process or function thereof does not satisfy the disclosure requirements.
The CSA was silent on its review of executive compensation disclosure in light of the proposed amendments to Form 51-1012F6 – Statement of Executive Compensation. Issuers should watch for the amendments made to that Form for future disclosure.
Issuers are required to disclose their risk management mandates as well as how the board delineates the roles and responsibilities in respect of risk management. Written mandates outlining the identification of principal risks are required and, if applicable, issuers should discuss the ways in which board committees contribute to risk management.