Bill C-25 uses ‘comply-and-explain’ model to put pressure on companies

In a bid to boost diversity on corporate boards, the federal government passed Bill C-25 on May 1 — an Act to amend the Canada Business Corporations Act (CBCA), the Canada Cooperatives Act, the Canada Not-for-profit Corporations Act and the Competition Act.

The move follows similar steps taken by the Canadian Securities Regulators and the Ontario Securities Commission a couple of years ago, and outlines requirements around diversity disclosure.

Essentially, federally incorporated public companies will be subject to a “comply-and-explain” model by having to provide “prescribed information respecting diversity among the directors and among the members of senior management as defined by regulation.”

The diversity involves “designated groups” as defined by the Employment Equity Act, meaning women, people with disabilities, visible minorities and Indigenous peoples.

Policies, targets in spotlight

The proposed amendments will require disclosure on target numbers and the current representation of designated groups on the board or in senior management positions, according to Stephen Robertson, a partner at Borden Ladner Gervais in Vancouver.

The amendments will also require the disclosure of policies related to the identification, nomination and selection of designated groups for director and senior management appointments.

“If they don’t have such policies, they have to put out reasons why they don’t have such policies, and why they don’t think that’s appropriate if that’s part of it,” he said.

“It’s an attempt to make people really think about this and probably have a really strong position for not doing it if they’re not going to comply with it, because you’re basically trying to justify that position to shareholders as to why you don’t think this is an appropriate thing for you to follow along with.”

It’s something the affected companies will have to revisit and reconsider every year, and either confirm they still believe whatever position they put forward is still accurate, or change and actually adopt those policies in the interim, said Robertson.

“The theory is that shareholders, if they don’t see appropriate action or feel different actions should be taken, they would be providing a message through their votes,” he said.

“(With Bill C-25), if you get a majority of withholding votes, that actually counts as ‘against,’ effectively, so there is more of a threat of a withhold vote being a potential non-election. So the need to be responsive to your shareholders is critical and just as important if not more important now that it was before. And you might be seeing that message come across for entities that aren’t doing their disclosure properly or not complying fully with the intent of the regime.”

Affected employers will be required to disclose if they have a policy and if not, why not, according to John Kuzyk, a partner at Blakes in Toronto.

Also, they will need to outline how they determine if the policy is effective and what diversity targets they have, along with providing the percentages of people from the designated groups in board and executive office positions.

“The policy rationale or thought behind it is that by forcing people to explain whether or not they have a policy, you may impel people to have a policy, particularly if their shareholders — remember the disclosure is really aimed at the shareholders — feel that that is important,” he said.

And if a federally incorporated public company failed to provide the proper disclosure, it would be subject to the general remedies under the federal legislation, which could include fines or the director under the CBCA making an order.

It’s critical that the legislation affects both boards and senior management, according to Tanya Van Biesen, Toronto-based executive director for Canada at Catalyst.

“The board thing (lack of diversity) is never going to go away unless we address the pipeline around the representation of women in senior roles, so this is bang-on the kind of strategy we need to have,” she said.

“We’re starting to see it in Canada, we’re starting to see it in other jurisdictions, where investors are voting down boards of directors or certain directors because of lack of effort shown around diversity, so that does change behaviour.”

Overall, this is a positive step forward — but more could be done, said Van Biesen.

“We do believe that companies that are operating under best practice should implement non-zero targets as part of the work that they’re doing… it’s been shown to be effective across the companies in Canada that have been subject to employment equity since 1995, so we do believe that’s a missing piece. And we’re hopeful that the companies that are most serious about talent will do that themselves.”

Preparing for the changes

To be prepared, the ideal thing and the important thing for employers to do is to adopt these policies, said Robertson.

“For federal companies that are public, you’ll probably see a lot of these policies actually being adopted to the extent they’re not already adopted.”

Affected companies should also be considering the designated groups as part of their hiring regime, including board positions, he said.

“It’s (about) really expanding your network, and speaking to other people in your own industry and other industries to see if they have contacts that might be appropriate… so not just trying to stay within the small subgroup of people you look at usually for expanding your board, but trying to expand your own horizons and your own windows to see if there’s other people out there.”

That could mean some star players in the designated groups are in high demand, said Robertson.

“They could see a lot of competition to attain them by various compensation packages. Usually, that’s not as much a system at the board level because often they are paid relatively equally amongst each other, but at the executive level, I could see the compensation — while it does get publicly disclosed for the highest paid people, it’s still something that is a little more flexible — and I could see the packages, especially in the beginning, being more lucrative just to try to achieve these targets.”

In looking at the small and mid-size sector in Canada, a lot of companies are going to be caught flat-footed or not yet ready to take all of this on, said Van Biesen.

But anybody who’s serious about talent hopefully had this on their radar screen to begin with.

“The biggest and most important thing they can do is to get to know these talent bases quickly, so there are great associations out there that can provide great linkages to people with disabilities, Indigenous peoples. I also think it’s going to require companies to dig more deeply in terms of investing in these communities.”

And it’s going to create greater competition for talent, without a doubt, she said.

“I suspect what you’re going to get is a little bit similar to what we’ve had with women… You’re going to have a small number of people targeted for a large number of opportunities. So, in Canada, we’ve seen the same names appear on boards of directors over a period of time, and it’s taken a while for boards even to get their heads around appointing first-time board directors to their board because they would rather go to the tried-and-true.”

HR should also ensure the HRIS systems are set up to be able to set a baseline, said Van Biesen.

“A lot of HRIS systems right now are not even set up so we can even count who we have, so we need to count who we have to figure out where we are,” she said.

“We need to create a culture whereby, for instance, our Indigenous, our people with disabilities feel comfortable self-disclosing. Because not every disability is a visible disability, not every Indigenous person feels comfortable self-disclosing they are of an Indigenous background. So in order to do that, you have to create a culture where people feel comfortable and safe doing that, and there will not be repercussions as a result of having disclosed that information.”

Posted on Published on May 30, 2018 by Sarah Dobson