The Ontario Securities Commission has proposed a new rule that would require companies to report annually on their policies to add more women to their boards and executive ranks.
The new rules unveiled Thursday will also require companies to report on their term limits for directors, which proponents argue will help ensure there is more board turnover so new directors – including women – can be added to the mix.
Companies are also being asked to report on whether they have voluntarily adopted targets for women on their boards or in executive roles.
The new rule, which is open for public comment until April 16, follows a "comply or explain" model that the OSC indicated last year it favours for its gender diversity standards. Such a model does not require companies to add women to their boards or adopt a diversity policy, but requires them to explain why they have opted not to comply with the recommendation.
Although some critics have said a "comply or explain" approach will not be strong enough to convince companies to make significant board changes, OSC chairman Howard Wetston said he believes a voluntary approach can spur change without the need for stronger rules such as mandatory quotas.
"While there are other tools, obviously, I actually think it's unnecessary at this stage," he said Thursday.
Mr. Wetston said many of Canada's other corporate governance guidelines also use a "comply or explain" model – such as guidelines to have a majority of independent directors on boards – and they have led to change. "That's what we have been relying on in this area, and I do believe corporate governance has improved as a result."
Although the rules are being adopted only by Ontario's securities regulator, they will have wide application in Canada because they will apply to all companies listed on the Toronto Stock Exchange.
Alex Johnston, executive director of women's advocacy group Catalyst Canada, which has called for rule changes to get more women on boards, said the OSC's proposal is "a great Canadian model" that suits the country's corporate culture. It makes the standards voluntary, but includes enough "meaty" detailed reporting requirements to ensure it pushes companies to look seriously at their diversity practices, she said.
"I think they nailed it," Ms. Johnston said. "I think they understand the Canadian corporate culture, where we're at right now, and I think they've chosen an approach that for now works well."
Ms. Johnston said it is important that the OSC intends to review the rule in three years to assess its effectiveness, which creates a time frame for companies to show progress on the issue or potentially face more proscriptive OSC rules.
Mr. Wetston said the three-year review is good practice and was not intended as a deadline, but "if public companies see that as a three-year deadline, that's a good thing."
The OSC announced last July that it intended to introduce a new rule for women on boards after being asked by the province's Liberal government to consider new regulation. The government has argued that research shows more gender diversity in corporate leadership is correlated with better corporate performance.
Women currently comprise about 12 per cent of directors on the boards of Canada's largest companies in the S&P/TSX composite index, a number that barely changed from 11 per cent two years earlier.
Stephen Erlichman, executive director of the Canadian Coalition for Good Governance, which represents most of Canada's largest institutional investors, said his members support having a comply or explain rule for diversity on boards, but said the OSC should expand the rule to also cover smaller companies listed on the TSX Venture Exchange.
The CCGG would also like the OSC to give shareholders more power to propose or negotiate new nominees for boards, he said. "That in and of itself would improve gender diversity," he said.
The OSC also surveyed about 1,000 companies listed on the TSX about their diversity. Of the 448 companies that replied, 57 per cent said they had no female directors and only 3 per cent said they had three female directors. Women held less than 10 per cent of executive officer positions at 53 per cent of the companies.
Over 80 per cent of the companies said they do not publicly disclose the proportion of women in the organization or in executive officer positions, and 82 per cent said they do not have a policy on director term limits. More than 90 per cent said they do not have a policy for the identification or nomination of female directors, and 94 per cent said they had no targets for the representation of women on the board or in executive roles.