A major new study of the state of corporate governance in Canada suggests boards should have at least 40 per cent of its members identify as women and 30 per cent from underrepresented racial groups, Indigenous people and disabled people.
To help achieve that goal, companies should consider placing term limits of 12 years on their board members, the report says.
The authors are the TMX Group Ltd. (the parent of the Toronto Stock Exchange) and the Institute of Corporate Directors (ICD), two of the most influential players in Canada’s corporate-governance world. As the country’s main stock exchange, the TSX has the power to set listing standards that companies must adhere to. The ICD is the primary group offering introductory and continuing education for the country’s corporate directors.
The recommendations are a small part of a deep and broad report, Charting the Future of Canadian Governance: A Principled Approach to Navigating Rising Expectations for Boards of Directors. In its 117 pages, it covers topics from leadership to financial reporting to climate change and rising environmental, social and governance standards. Many of the principles it outlines are broad and likely uncontroversial.
It is in its diversity recommendations, however, that it suggests companies adopt an aggressive policy that federal law has yet to require.
Since 2015, Canadian securities regulators have had a “comply or explain” approach to gender diversity, in which a company that does not have a hard target for women on its board must explain why. Since 2020, the government has required companies incorporated at the federal (but not provincial) level to disclose in shareholder circulars whether they had directors who were visible minorities, of Indigenous heritage or people with disabilities.
The result is that Canadian companies have made slow, incremental progress on gender diversity and are only now beginning to add a substantial number of directors from diverse backgrounds.
At 677 Canadian public companies that disclosed directors’ genders in their securities filings, women held 23.4 per cent of the more than 5,000 total board seats in 2021, according to an annual study of diversity by law firm Osler, Hoskin & Harcourt LLP. That’s an increase of 2.2 percentage points compared with 2020.
At 337 companies that provided disclosure on non-gender diversity, Osler said, the number of visible minorities jumped 34.9 per cent in 2021 compared with 143 in 2020; Indigenous peoples stayed flat, at eight; and people with disabilities rose to 11 from eight.
“Canadian companies need to move faster and more decisively and set targets to achieve diversity within a reasonable amount of time.” the TMX/ICD report says.
“Every board should reflect the diversity of the company’s stakeholders and the communities where it operates. To achieve diversity within a reasonable time, set targets for the makeup of the board to have no less than 40 per cent of people who identify as women and no less than 40 per cent of people who identify as men.”
That, the TMX/ICD report says, leaves room for individuals from the Two-Spirit, lesbian, gay, bisexual, transgender, queer and intersex communities, and additional sexually and gender-diverse people. These people are the subject of the federal 2SLGBTQI+ Action Plan, launched in August, to advance their rights and equality.
Any discussion of diversity on boards “should include the issue of term limits for directors,” the TMX/ICD report says. “If few board positions come open for diverse candidates to fill, the pace of change will remain slow.”
It recognizes that term limits “may create tensions,” adding companies could maintain the flexibility for an extension “in rare cases” where it’s in the company’s best interests.
The ICD’s chief executive officer, Rahul Bhardwaj, and Cheryl Graden, the chief legal & enterprise corporate affairs officer at TMX Group, led the committee that crafted the report. Women and racialized people, including an Indigenous man, made up nine of the 11 other members.
While the TSX can create standards for listing on its exchange, the recommendations in the report are not policy proposals from the TSX.