Where are the directors in a world in crisis?

Open this photo in gallery:

Peter Dey is chairman of Paradigm Capital and Executive-in-Residence at the the University of Toronto’s Rotman School of Management. Sarah Kaplan is Distinguished Professor at Rotman and author of The 360º Corporation: From Stakeholder Trade-offs to Transformation. They are also the co-authors of the Michael Lee-Chin Family Institute for Corporate Citizenship’s new report, 360º Governance: Where are the directors in a world in crisis?

In the past year, and indeed in recent weeks and days, the landscape for Canadian corporate boards of directors has changed dramatically.

The COVID-19 pandemic has highlighted more than ever the corporate world’s role in addressing social issues. And beyond that, regulators, institutional investors, consumers and workers are intensifying their attention to climate risk, systemic racism, women’s economic inclusion and Indigenous rights, among other challenges of our century.

Canada’s corporate boards are trapped in the past, must be revamped for ESG era: governance experts

Governance and other reforms to address these challenges are speeding ahead in countries around the world, and Canada risks being left behind.

Twenty-five years ago, Canada faced a similar turning point in corporate governance. Triggered by the poor response by the Canadian corporate sector to the stresses of the 1990–91 recession, the development of the 1994 Dey Report asked, “Where were the directors?” That report proposed guidelines urging boards to align with emerging global expectations for good governance, in particular around board independence and oversight.

Today, we need a new set of guidelines. The governance standards of the 20th century are simply not adequate to address the challenges of the 21st. The question now is, “Where are the directors in a world in crisis?”

Our answer comes in the form of 13 guidelines in a report being launched today. Together, these guidelines– which emphasize the need for a corporate purpose, deep understanding of all stakeholders, rigorous board refreshment, realigned executive compensation, and active policies on the environment, diversity and Indigenous rights – draw a new picture of what it means to be a competent board and a competent board member.

Canada, unlike other jurisdictions such as the United States, has the advantage of the 2008 Supreme Court of Canada’s BCE decision, which held that boards of directors have a duty to act with a view to the best long-term interests of the corporation, and not exclusively in the interests of the shareholders.

This decision gives boards all of the leeway they need to establish a corporate purpose that addresses the impacts of the corporation’s operations on all of its stakeholders. At the same time, the BCE decision gave little guidance as to how companies should implement this approach and thus the ghost of “shareholder primacy” still haunts Canadian corporate board rooms.

In our guidelines, we argue that in establishing a corporate purpose and an understanding of the company’s stakeholders, a board will be better positioned to determine the best interests of the corporation, exercise good business judgment and execute its duties of loyalty and care.

After months of consultations and a careful review of the scholarly research on governance, our sense is that most boards of directors are aware of the many new demands that companies face, but the vast majority don’t have a good sense of what these challenges involve and are uncertain how to respond.

For example, most boards accept the value of increasing the diversity of their membership and the need to address the gender and racial power gap at the top. Institutional investors are withholding votes for boards that do not meet diversity targets. Yet, progress is still extremely slow.

Even after more than four years of the Ontario Security Commission’s “comply or explain” regulations, women constitute just 17 per cent of Canadian boards and 4 per cent of chief executive officers, and the gap is even more severe for racialized people, Indigenous people, members of the LGBTQ community and people with disabilities.

The Ontario Capital Markets Modernization Taskforce has just this month recommended that all companies make environmental disclosures according to the Task Force on Climate-Related Financial Disclosures standards, but few boards do and fewer do it well. The enactment of Bill C-15 implementing the UN Declaration on the Rights of Indigenous Peoples may require that corporations obtain the “free, prior and informed consent” from affected Indigenous peoples. As a matter of risk disclosure, corporations should report activities with and without free prior and informed consent to shareholders. But, few companies truly engage in the full mutual process of achieving consent.

Increasingly investors will turn away from companies that do not take a bold stance on environmental, social and governance issues. BlackRock’s announcement this year requiring companies it invests in to make climate disclosures has caused nearly two dozen Canadian companies to promise action on climate change. Workers seeking employers they can believe in and consumers shopping with their values will amplify these pressures.

Millennials, Gen Z and the new pandemic Gen C, who will soon make up three-quarters of the labour market and the majority of shoppers, simply don’t want to participate in an economy that doesn’t work for everyone. They are driving our shift from shareholder capitalism to stakeholder capitalism.

For every company – public or private, large or small – building board competencies to address these challenges will be good for business, good for society and good for Canadian competitiveness and prosperity.

Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.