Proposed Amendments to the Corporate Governance and Audit Committee Regimes
On December 19, 2008, the Canadian Securities Administrators (the CSA) published proposed National Policy 58-201 - Corporate Governance Principles (NP 58-201), National Instrument 58-101 - Disclosure of Corporate Governance Practices (NI 58-101), National Instrument 52-110 - Audit Committees (NI 52-110) and Companion Policy 52-110CP (52-110CP) (collectively, the Proposed Materials). The Proposed Materials would replace the current national policy and instruments covering reporting issuer governance practices and disclosure regarding those practices, and reflect the tendency of the CSA to adopt regulations based upon identified principles rather than detailed prescriptive requirements.
National Policy
58-201 Current NP 58-201 sets out certain corporate governance guidelines that, although not mandatory, are coupled with the “comply or explain” disclosure regime of NI 58-101.
The proposed replacement NP 58-201 establishes nine core corporate governance principles applicable to all issuers that a board of directors should consider and in respect of which disclosure is required. Each principle is accompanied by commentary that provides relevant background and explanation, along with examples of practices that could achieve the principle’s objectives. However, these examples do not create obligatory practices or minimum requirements, and the principles do not establish minimum standards or “best practices”. The nine core corporate governance principles are as follows:
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 responsibility of the board and executive officers should be clearly defined in order to, among other things, promote accountability to the issuer and its shareholders and an appropriate allocation of authority. Examples of recommended practices include adopting a written mandate or formal board charter that details the board’s responsibilities and the roles and responsibilities of each standing committee of the board, if any, and developing clear position descriptions for the chair of the board and chairs of board committees.
Principle 2 – Structure the Board to Add Value
The board should be comprised of directors that will contribute to its effectiveness.
An effective board is structured in a way that allows directors to fully and effectively carry out their fiduciary duties and add value to the issuer with a view to its best interests. Certain factors should be considered when determining the composition of a board, such as: (i) competencies; (ii) integrity; (iii) independent judgment; (iv) commitment; (v) board interaction; and (vi) board size.
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.
A board should have procedures for selecting and appointing directors to ensure members have the necessary competencies. A board nomination committee could facilitate procedures for selecting and appointing directors, although the responsibility for these practices rests with the full board.
Principle 4 – Continously 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.
A board’s performance is dependent upon directors having the requisite knowledge, information and abilities to fulfil their obligations. A board should provide its new directors with comprehensive orientation and continuing education opportunities.
Principle 5 – Promote Integrity
An issuer should actively promote ethical and responsible behaviour and decision-making.
The board has a responsibility to set the ethical standards for the issuer’s directors, executive officers and employees. Examples of recommended practices include adopting a code of conduct.
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.
Conflicts of interest may arise in various situations, for example, when: (a) there is a significant divergence of interests among shareholders or their interests are not completely aligned; (b) one or more directors cannot be considered impartial in connection with a proposed decision to be made by the board; (c) a contract, arrangement or transaction is entered into between an issuer and a control person or significant shareholder; or (d) an issuer makes a decision or enters into a contract, arrangement or transaction that will benefit one or more of its officers or directors. An issuer should have practices in place to identify, assess and resolve their actual and potential conflicts of interest.
Principle 7 – Recognize and Manage Risk
An issuer should establish a sound framework of risk oversight and management.
Risk oversight and management should focus on identifying the most significant areas of uncertainty or exposure that could have an adverse impact on the achievement of the issuer’s goals and objectives. Examples of recommended practices include developing, approving and implementing policies and procedures for the oversight and management of principal risks, regularly reviewing and evaluating the effectivenenss of these policies and procedures, and requiring executive officers to regularly report to the board on the effectiveness of the policies and procedures.
Principle 8 – Compensate Appropriately
An issuer should ensure that compensation policies align with the best interests of the issuer.
The board should be satisfied that appropriate compensation policies and practices are in place for executive officers and directors. 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.
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 in an effort to foster a productive relationship between shareholders and the board. Examples of recommended practices include posting on the issuer’s website a clear description of the voting process for registered and beneficial shareholders, giving shareholders the option of voting electronically, and giving shareholders or proxyholders the option of attending meetings through electronic means.
National Instrument 58-101
The CSA has proposed revisions to the current governance disclosure requirements. Under NI 58-101, an issuer would now be required to disclose: (i) the practices it uses to achieve the objectives of each principle set out in NP 58-201; and (ii) certain factual information, such as the board’s composition and information about any of its standing committees. There would be no alternative disclosure regime for “venture issuers” (reporting issuers that do not have any of their securities listed on the Toronto Stock Exchange or certain other stock exchanges).
In addition, under NI 58-101, an issuer would no longer be required to file a copy of its code of business conduct and ethics or amendments to the code on SEDAR. However, an issuer would have to provide a summary of any standards of ethical and responsible behaviour and decision-making or code adopted by the issuer and describe how to obtain a copy of its code, if any.
National Instrument 52-110
The most significant change to the current instrument regarding audit committees is the revision of the definition of independence that applies to audit committee members and other board members. Section 1.4 of NI 52-110 would provide that “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 can never be considered independent. While a control person or significant shareholder is not disqualified from being independent, boards should 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, determine whether this relationship may be reasonably perceived to interfere with the exercise of independent judgment. The proposed definition is broader than in the current instrument in that it will capture relationships that are reasonably “perceived” to interfere with the exercise of independent judgment (the current definition uses the language “reasonably expected”). The CSA propose that NI 52-110 will not contain the “bright line” tests to determine director independence, but will instead include a non-exhaustive list of relationships that could affect an individual’s independence. Ultimately, determining independence will be left to the reasonable judgment of the board of directors. The new definition of independence would apply to all board members, including audit committee members.
The CSA are inviting comments on the Proposed Materials until April 20, 2009.
This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.
If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.
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