As corporate America weathers the regulatory storm caused by the implementation of the Sarbanes-Oxley Act, Canadian issuers are gearing up for rough waters ahead when the Ontario Securities Commission’s (OSC) governance proposals finally launch. While the OSC’s measures won’t rock the boat as much as Sox – due to pre-existing governance guidelines established by the Toronto Stock Exchange (TSX) – they will affect Canadian companies not currently following high governance standards.
Back in January the OSC submitted a proposal for public comment that describes 18 best corporate governance practices and requires public companies – depending on their market cap – to disclose their adoption of these measures. Standards described in the proposals relate to the composition of the board, its mandate and committees; director education and assessment; and codes of business conduct and ethics.
Higher stakes
Canadian companies currently operate under a voluntary system of governance standards. In 1995 TSX set out a series of 14 governance guidelines that TSX-listed companies are encouraged – but not obliged – to adopt. In order to entice companies to abide by these principles, TSX issuers are required to disclose whether or not they comply with the exchange’s governance principles.
The problem with this voluntary model is that there is no real recourse when companies don’t comply or fail to disclose whether or not they’re in line with the principles. ‘Unfortunately the only real remedy the TSX has is to delist a company, which is kind of drastic,’ notes Ross McKee, a lawyer with Blake, Cassels & Graydon. As a result, many companies don’t feel under pressure to communicate whether they’re living up to TSX standards. In fact, a recent joint study conducted by Patrick O’Callaghan & Associates and Korn/Ferry International found 20 percent of Canada’s 319 public companies don’t disclose whether they’re following these governance guidelines.
However, with the OSC overseeing companies’ compliance with governance standards, there are now real repercussions for firms that fail to disclose whether or not they follow the regulators’ principles. ‘Company reports will fall under securities regulators’ continuous disclosure reviews, so the stakes are a bit higher,’ explains Jane Watson, head of Watson Investor Relations. ‘Failure to provide adequate disclosure would be a breach of securities laws, and it could lead to enforcement procedures and sanctions.’
As McKee notes, ‘If a company doesn’t disclose in the way the securities regulators find satisfactory, OSC has its own remedies.’ For example, the commission could censure particular company directors or officers by bringing regulatory procedures against them.
Beyond compliance
Canadian issuers have much to gain by being more open about their governance practices. Better transparency about how a company is run, including whether the board is following governance standards set out by regulators, helps IROs who sometimes field questions from investors when this information is not readily available. In fact, many companies have found it useful to actively promote their governance compliance in corporate materials beyond regulatory filings.
The Royal Bank of Canada (RBC), which took home the prize for best corporate governance at this year’s IR Magazine Canada Awards, has gone beyond the call of duty in promoting its governance structures. ‘We are very open about information on corporate governance,’ notes Nabanita Merchant, senior vice president of IR at RBC. ‘And I think the potential for questions is diminished simply because the information is all very easily available and out there.’
Last year, RBC built a separate web site to demonstrate its commitment to high standards of governance. The site includes all information related to RBC’s compliance with TSX and SEC requirements, as well as business conduct and ethics codes, and board and committee charters.
The bank also publishes a discussion of its governance practices in its proxy circular and annual report, a measure included in the TSX guidelines. Under the OSC proposal, companies must disclose their governance measures in an annual information form but are not required to report on governance in the proxy. However, RBC will continue to disclose this information in all three documents – a move governance experts applaud.
RBC has started issuing press releases highlighting significant changes to its governance. This is one of the 18 best practices the commission has proposed – companies should issue press releases immediately after a change in their code of business conduct and ethics. If a board director grants an employee a waiver from the code of business conduct and ethics, for instance, the firm must immediately send out a press release detailing the reason behind that decision.
Pushing the envelope
Another company pushing the governance envelope is Calgary-based Petro-Canada. The petroleum giant launched a separate governance web site last January, which details all of its governance practices including compliance with OSC best practices. This goes beyond what is required but helps settle any questions about whether the company is abiding by governance standards set out by the exchange and regulators.
‘We believe corporate governance contributes to shareholder value in that it ensures you have a well run, disciplined organization,’ notes Gordon Ritchie, senior director of IR for Petro-Canada. ‘Greater transparency makes it easier for investors to understand how we are set up and how we are addressing corporate governance issues.’
Under the OSC proposal, companies will have to disclose whether they have a code of business conduct, what it is and any amendments or waivers it has attracted. To comply, Petro-Canada is now including detailed information about its code of business conduct and ethics on the company’s governance site and in its proxy circular. ‘We also updated our code of business conduct and are rolling out sessions with the employees to communicate the code to them,’ says Ritchie.
Another Calgary-based company, Boardwalk Equities, offers a further example of a company that is forthcoming when it comes to talking about governance. While the company doesn’t have a separate governance site, it still manages to live up to the highest standards of governance transparency. Winner of the grand prix for best overall investor relations in the mid-cap category at this year’s IR Magazine Canada Awards, Boardwalk Equities publishes a statement of corporate governance practices on its web site and in its management information circular, which is distributed to all shareholders.
‘There certainly have been rewards from this type of disclosure for our company,’ notes Paul Moon, director of corporate communications at Boardwalk Equities. ‘We have had many positive comments from shareholders regarding the amount of information available on our web site and in public documents. In fact, we’ve had some comments saying we almost have too much information.’
Companies have little or nothing to lose by properly disclosing details of their governance measures. Assuming the current OSC proposal is approved, firms will have to start disclosing whether they comply with the regulators’ governance best practices from next year.
This is good news for IROS because keeping a company’s governance practices hidden often leads to further questions or even disinterest from the buy side. ‘It can be a marketing benefit for a company to publicly disclose how it works and how these mandates operate as a way of satisfying existing or potential investors,’ notes McKee.
And making information more accessible to investors means IROs spend less time answering questions. As Merchant says: ‘Investors do care about corporate governance, but they probably don’t enquire as much of us as they would from other companies, because our disclosure on the subject is very good.’
These are the best practices included under the OSC proposal that are not covered by the TSX guidelines:
1 The compensation committee and nominating committee must be entirely independent.
2 A formal board mandate, plus charters for compensation and nominating committees, should be adopted and disclosed.
3 Each company should conduct an annual assessment of the board, its committees and individual directors.
4 Companies should have a code of business conduct and ethics and disclose its contents, as well as any amendments that are made or waivers given.
5 The definition of ‘independence’ for directors is tightened under OSC practices.
