Articles | July 3, 2024

Corporate Governance Developments in Canada

Like other jurisdictions around the world, Canada continues to witness a steady evolution of corporate governance standards, corporate reporting requirements and shareholder advocacy activities related to environmental, social and governance (ESG) topics.

This article summarizes recent developments, which are of interest to investors.

Corporate Governance Developments in Canada

New corporate reporting requirements on forced and child labour in supply chains

Canadian lawmakers recently passed the Fighting Against Forced Labour and Child Labour in Supply Chains Act (S.C. 2023, c. 9), which took effect on January 1, 2024, and follows a global trend of increasing regulation to monitor and thwart human rights violations in the supply chain. The new law requires that certain companies (described below) produce an annual report describing what actions they are taking to reduce and prevent forced labour and child labour in their supply chains. Examples include what policies and due diligence processes are in place, what aspects of the business carry a risk of violations, and any training provided to employees on forced and child labour.

The law applies to companies that are listed on a Canadian stock exchange as well as companies that conduct business in Canada and have at least $20 million in assets, generate at least $40 million in annual revenue or employ an average of at least 250 employees. These companies must disclose required information to the Minister of Public Safety and Emergency Preparedness starting May 31, 2024. Companies that fail to report by the deadline or make misleading statements in their reporting, face new penalties up to $250,000.

Adoption of international sustainability reporting standards

Like their counterparts in the U.S. and Europe, Canadian investors, beneficiaries and regulators are increasingly seeking better insights into a company’s management of ESG risks and opportunities, as well as consistent corporate reporting of ESG risks and opportunities in alignment with global reporting frameworks.

In March 2024, the Canadian Sustainability Standards Board (CSSB), which was formed in June 2023 to support the adoption of the International Financial Reporting Standards (IFRS) in Canada, announced its first set of proposed standards for firms to report sustainability and climate-related information in alignment with IFRS. CSSB proposed making the Canadian standards effective as of January 1, 2025. Now Canadian regulators will determine if the CSSB standards will be mandatory, as well as which companies will need to comply over what time horizon.

The Canadian Securities Administrators (CSA) and the Office of the Superintendent of Financial Institutions have previously signaled their support for IFRS and the Task Force on Climate-Related Financial Disclosures (TCFD) reporting standards, including a goal to adopt applicable requirements in the future. Should such reporting become mandatory nationwide or in certain jurisdictions, investors can expect increased reporting on how Canadian companies identify and manage ESG issues.

Required disclosure of corporate board and management diversity

In 2023, Corporations Canada shared the following key takeaways on the representation of designated groups — women, Indigenous people, members of visible minorities, and people with disabilities — on the boards of directors of and in senior management at companies governed by the Canada Business Corporations Act (CBCA). CBCA-governed companies include more than 500 publicly traded companies in Canada. They have been required to disclose this information annually since January 1, 2020.

Percentage of Firms with at Least One Representative of Various Demographic Groups on the Board in 2023 and the Change from 2022

Firm Board Reperesentatives

Source: Corporations Canada

Percentage of Senior Managers Representing Various Demographic Groups in 2023 and the Change from 2022

Senior Managers Representatives

Source: Corporations Canada

Companies must provide such information to shareholders as well as to Corporations Canada, which aggregates the data and provides key findings to the public. The companies are also required to report whether the firm has an adopted written policy regarding the nomination of diverse board directors, as well as whether the firm has adopted targets for the representation of diverse individuals among the board and senior management, among other information.

Corporations Canada notes that 6 percent of BCA-governed companies fail to provide complete or standardized diversity information, and that corporations have an obligation to stay informed of evolving requirements.

Investors engage Canadian companies on environmental topics and executive compensation

Investors continue to focus on Canadian companies’ management of ESG risks and opportunities, as evidenced by numerous shareholder proposals brought forward at companies’ annual shareholder meetings in 2024. While shareholder proposals are not as common in Canada as in the U.S., investors in Canadian companies continue to engage companies and introduce proposals on subjects including climate risk, executive compensation and human capital management.

Climate-related proposals

Many of Canadian’s largest companies, including Canadian banks and energy companies, continue to receive shareholder proposals related to their policies and activities related to the energy transition. For example, Canada’s largest banks, including the Royal Bank of Canada (RBC), Toronto-Dominion Bank and the Bank of Nova Scotia, all received a shareholder proposal asking them to hold an annual advisory vote among shareholders on the company’s environmental objectives and climate transition plan.

RBC received a proposal from the New York City Office of the Comptroller, which went to six North American banks in total, asking it to disclose its ratio of clean energy financing to fossil fuel financing. The Comptroller’s Office argued that annual disclosure of a clean energy supply ratio will allow investors to better assess a bank’s role in the energy transition and quantify its progress made achieving stated net zero commitments. RBC ultimately agreed to provide the requested ratio and their underlying methodology.

Another example of a climate-related proposal includes one at Toronto-Dominion Bank that asked the company to disclose its plan to align its lending with its 2030 greenhouse gas emission reduction goals. A similar proposal introduced at the firm last year gained 24 percent support among shareholders.

Large Canadian oil and gas companies, such as Enbridge and Suncor Energy, also received climate-related shareholder proposals. Enbridge received a proposal asking it to report how the company’s governance systems are functioning in light of reported misleading statements to customers about the role of gas in the energy transition and pipeline safety. Enbridge also received a proposal asking it to disclose its Scope 3 greenhouse gas emissions, which includes all emissions that occur in an organization’s value chain. Finally, Suncor Energy received a proposal asking it to provide shareholders with audited results of the quantitative impacts of a range of climate transition scenarios on the company’s financials.

Continued focus on executive compensation

Investors continue to focus on Canadian companies’ executive compensation plans, expressing discontent via advisory “say-on-pay” votes among shareholders and introducing shareholder proposals seeking greater disclosure on CEO pay compared to median worker pay.

In 2023, there were 220 say-on-pay votes at Canadian companies, according to the proxy advisory firm ISS. The average level of support was 91 percent, a slight drop from 92 percent support in 2022. Twenty-three companies received less than 80 percent support among shareholders, with four of those companies receiving less than 50 percent support.

Among the largest companies listed on Canada’s primary stock exchange, the Toronto Stock Exchange (TSX), more companies are integrating environmental and social metrics into their executive compensation plans, creating financial incentives for top executives to meet business goals related to energy use, employee engagement or diversity. For example, ISS reports that 67 percent of companies in the S&P/TSX Composite Index now integrate environmental and social metrics into short-term compensation programs.

Finally, shareholders introduced a proposal at several Canadian companies, including RBC and Toronto-Dominion Bank, asking each company to disclose the ratio of CEO pay to the company’s median worker pay. In 2018, the U.S. Securities and Exchange Commission required public companies to disclose the aforementioned pay ratio, increasing pressure for such disclosure in other jurisdictions, including Canada. Such calls from investors are likely fueled by recent reports that Canada’s top CEOs earn 246 times the average Canadian worker.

Implications for investors

Companies around the world, including in Canada, are being asked by regulators, standard-setters and their own investors to report more on the ESG risks to their business, as well as what they are doing to manage those risks.

Those advocating for increased reporting and better management of ESG risks (and opportunities) expect such efforts will give investors more information by which they can make better-informed investment decisions. Advocates also cite the adage, “what gets measured gets managed,” pointing out that when companies measure and report on issues that can impact their business, like child labour in the supply chain or their readiness for the energy transition, they put themselves in a better position to manage those challenges and mitigate adverse financial effects.

Ultimately, time will tell what impact such efforts will have on company performance and investment returns. In the meantime, investors in Canada can anticipate that companies, regulators and other stakeholder groups will continue to focus on ESG reporting and risk-management practices.




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