CSA Staff Notice Update on CSA Consultation Paper Approach to Director and Audit Committee Member Independence

Size: px

Start display at page:

Download "CSA Staff Notice Update on CSA Consultation Paper Approach to Director and Audit Committee Member Independence"

Calvin Sydney Hardy
5 years ago
Views:

1 Ntices / News Releases CSA Staff Ntice Update n CSA Cnsultatin Paper Apprach t Directr and Audit Cmmittee Member Independence CSA Staff Ntice Update n CSA Cnsultatin Paper Apprach t Directr and Audit Cmmittee Member Independence July 26, 2018 Intrductin On Octber 26, 2017, the Canadian Securities Administratrs (CSA r we) published fr cmment CSA Cnsultatin Paper Apprach t Directr and Audit Cmmittee Member Independence (the Cnsultatin Paper). The purpse f the Cnsultatin Paper was t facilitate a brad discussin n the apprpriateness f ur current apprach t determining directr and audit cmmittee member independence. The Cnsultatin Paper was structured as fllws: key histrical develpments relating t ur crprate gvernance regime; apprach t determining independence in Canada; cmparative verview f the appraches t determining independence in Canada and in ther jurisdictins; and discussin n the benefits and limitatins f the Canadian apprach. In additin t any general feedback, we als invited cmments n specific questins. This ntice prvides an update n the status f the cnsultatin. Stakehlder feedback received The cmment perid ended n January 25, We received 27 cmment letters frm varius stakehlders, including: investrs; investr advcacy grups; issuers; natinal rganisatins representing crprate directrs and ther prfessinals; law firms; ther stakehlders. We wish t thank all cmmenters fr cntributing t the cnsultatin. A summary f cmments presenting the varius views expressed in respnse t the Cnsultatin Paper is attached as Appendix A. We have reviewed and discussed the cmments received, and we nte the fllwing: Mst cmmenters expressed general supprt fr ur current apprach. These cmmenters indicated that ur apprach is apprpriate fr all issuers in the Canadian market and that it prvides certainty, cnsistency and predictability in determining independence. Mst cmmenters prefer maintaining ur current apprach n the basis that it is well-understd by market participants and that it is generally aligned with the apprach applicable in the United States. July 26, 2018 (2018), 41 OSCB 6007

2 Ntices / News Releases Sme cmmenters prpsed enhancements t ur current apprach (e.g., additinal guidance n the applicatin f the apprach). A few cmmenters suggested reassessing certain bright line tests (e.g., threshlds r parameters) t cnfirm their apprpriateness. Certain cmmenters expressed that they were generally nt supprtive f ur current apprach. These cmmenters suggested that the current apprach is ne-size-fits-all and nt apprpriate fr all issuers, creating inflexibility and verly-restrictive parameters in determining independence. Certain cmmenters submitted that ur current apprach des nt recgnize the particular circumstances f certain issuers and that it eliminates valid candidates frm serving as independent directrs r audit cmmittee members. Certain cmmenters prpsed replacing the bright line tests with a mre principles-based apprach prviding greater discretin t bards f directrs in determining independence. These cmmenters suggest that independence is a questin f fact that shuld be determined by the bard n a case-by-case basis. Overall, mst cmmenters expressed general supprt fr ur current apprach and there were n cmmn trends r views in respect f suggested changes. Determinatin Cnsidering the realities f the Canadian market and the cmments received, the CSA have cncluded that it is apprpriate t maintain ur current apprach t determining directr and audit cmmittee member independence. We recgnize that ur current apprach has benefits and limitatins. Upn review, we are satisfied that it strikes an apprpriate balance between affrding sufficient discretin t the bard f directrs t determine whether an individual culd reasnably be expected t exercise independent judgement, and prviding prescriptive elements that preclude an individual frm being cnsidered independent in certain circumstances. The certainty, cnsistency and predictability f maintaining ur apprach assists bards in making independence determinatins and enables stakehlders t evaluate the independence f directrs and audit cmmittee members. Our current apprach has been in place since 2004 and we nte that stakehlders understand and have adapted accrdingly. Making changes t ur current apprach r replacing it with an alternative apprach culd result in additinal csts fr issuers and effrts fr investrs t adapt t such changes. We are f the view that, in this case, any ptential benefits f a change t ur apprach are utweighed by the ptential negative impact f implementing such a change. Questins Please refer yur questins t any f the fllwing: Michel Burque Diana D Amata Senir Regulatry Advisr, Senir Regulatry Advisr, Directin de l infrmatin cntinue Directin de l infrmatin cntinue Autrité des marchés financiers Autrité des marchés financiers michel.burque@lautrite.qc.ca diana.damata@lautrite.qc.ca Sphia Mapara Samir Sabharwal Legal Cunsel General Cunsel The Manitba Securities Cmmissin Alberta Securities Cmmissin sphia.mapara@gv.mb.ca samir.sabharwal@asc.ca J-Anne Matear Jeff Scanln Manager, Crprate Finance Senir Legal Cunsel Ontari Securities Cmmissin Ontari Securities Cmmissin jmatear@sc.gv.n.ca jscanln@sc.gv.n.ca July 26, 2018 (2018), 41 OSCB 6008

3 Ntices / News Releases Nazma Lee Heidi Schedler Senir Legal Cunsel, Crprate Finance Senir Enfrcement Cunsel, Enfrcement British Clumbia Securities Cmmissin Nva Sctia Securities Cmmissin nlee@bcsc.bc.ca heidi.schedler@nvasctia.ca July 26, 2018 (2018), 41 OSCB 6009

4 Ntices / News Releases APPENDIX A SUMMARY OF COMMENTS Generally supprtive f ur current apprach GENERAL COMMENTS 17 cmmenters expressed general supprt fr ur current apprach. These cmmenters nted a number f benefits, including that ur apprach: is apprpriate fr all issuers in the Canadian market; prvides certainty, cnsistency and/r predictability in determining independence; sets clear, minimum requirements that preclude an individual frm being cnsidered independent r serving n an audit cmmittee; strikes an apprpriate balance in terms f discretin and prescriptive elements; des nt unduly limit the pl f qualified candidates wh can serve as independent directrs r audit cmmittee members, and issuers can expand the pl f qualified candidates by cnsidering mre wmen; is understd and has been incrprated in bard and cmmittee prcesses; is useful fr investrs in making prxy vting decisins; and is in line with the apprach t determining independence in the United States. Generally nt supprtive f ur current apprach 10 cmmenters did nt generally supprt ur current apprach. These cmmenters nted a number f limitatins, including that ur apprach: is nt apprpriate fr all issuers in the Canadian market, particularly cntrlled cmpanies; has created inflexibility and verly restrictive parameters in determining independence; eliminates valid candidates frm serving as independent directrs r audit cmmittee members; des nt recgnize the need fr directrs t have cmpany-specific knwledge and the requisite skills and experience; has resulted in negative perceptins, lwer gvernance scres and adverse vting recmmendatins fr hlding cmpanies and grup cmpanies; has resulted in cntrlled issuers, including family-cntrlled issuers, being penalized when they appint an executive fficer r emplyee f the issuer s parent n ther cmmittees f the bard, as Natinal Plicy Crprate Gvernance Guidelines (NP ) recmmends that the cmmittees be cmpsed entirely f independent directrs; des nt recgnize the fact that any cncerns which may exist in a cntrlled cmpany relating t cnflicts f interest r self-dealing can be reslved directly thrugh a cmmittee f directrs wh are independent f the cntrlling sharehlder; des nt recgnize the legitimacy f significant sharehlders t play an active rle in gvernance, including n the audit cmmittee; des nt recgnize the unique and inherent advantages f family cntrl with respect t lng-term sustainable prfitability; des nt recgnize the significant presence f family-cntrlled cmpanies in Canada s ecnmy; unnecessarily uses directr independence rules t prvide additinal prtectin t minrity sharehlders, given that pursuant t: cmmn law and crprate statutes, directrs are subject t a fiduciary duty t the crpratin, and nt t any single sharehlder r sharehlder grup; and Multilateral Instrument Prtectin Of Minrity Security Hlders In Special Transactins, minrity sharehlders are already prvided with rbust prtectins; and is nt in line with the CSA s traditinal apprach n crprate gvernance which prvides greater flexibility t the bard. PROPOSED CHANGES TO OUR CURRENT APPROACH 4 cmmenters expressed supprt fr ur current apprach withut prpsing any changes. While generally supprtive f ur current apprach, 13 cmmenters have prpsed certain changes, including: remving the venture issuer exceptins in ur current regime; prviding additinal guidance related t the applicatin f ur current apprach including: July 26, 2018 (2018), 41 OSCB 6010

5 Ntices / News Releases clarifying that the principle underlying the independence test is the bard s bligatin t determine whether any relatinships exist that culd interfere with the exercise f independent judgement withut relying slely n the enumerated list f thse individuals that are nt independent; and prviding examples f additinal relatinships fr bards t cnsider when fulfilling the afrementined principle; adding guidance addressing the impact f bard tenure n independence; adpting a best practices mdel, similar t the cmply r explain mdel, in additin t ur current apprach t take int accunt the particular circumstances f an issuer; reviewing whether ur current apprach cntinues t be apprpriate fr cntrlled cmpanies including: if the exemptin in sectin 3.3 f Natinal Instrument Audit Cmmittees (NI ) shuld be bradened t permit the cntrlling sharehlder and its representative, wh are therwise independent f the issuer and management, t participate n the audit cmmittee f the cntrlled subsidiary; that the cmpsitin requirements fr cntrlled cmpanies shuld require every member t be independent f management and a majrity, including the chair f the audit cmmittee, t be unrelated t an affiliated entity r significant sharehlder f the issuer; and deleting the deeming rule that prvides that fficers and emplyees f affiliates (ther than subsidiaries f the issuer), ntably a cntrlling sharehlder are deemed t be nt independent. Hwever, in specific cntrast, ther cmmenters als generally supprtive f ur current apprach expressly stated that ur current apprach cntinues t be apprpriate fr cntrlled cmpanies, that the relatinships set ut in the bright line test cmprise a very narrw grup and are f such a nature that they shuld nt present merely a rebuttable presumptin that they cmprmise independence, and that the CSA shuld cnsider measures t address cncerns relating t dual-class share structures and tightly-held crpratins by enhancing the independence f these directrs; revisiting and reassessing the bright line tests t cnfirm their apprpriateness and relevance, r better alignment with the cmparable standards applicable in the United States where apprpriate including: if certain threshlds (fr example, the $75,000 direct cmpensatin threshld) in ur current apprach shuld be mdernized and better harmnized with thse in the U.S., althugh thers tk the view that certain threshlds (i.e., the $75,000 threshld) shuld nt be increased; recnsidering the definitin f affiliate in light f the nature f cmplex rganizatins and adding clarity t the meaning f the term wrked n the issuer s audit ; reassessing if the bright line test in paragraph 1.4(3)(d) f NI (family member emplyed with internal r external auditr) is still apprpriate; recnsidering whether the additinal bright line tests fr audit cmmittee members cntinue t be relevant; revisiting the independence criteria prescribed in subsectin 1.4(3) t subsectin 1.4(7) f NI t ensure they are still apprpriate; and reassessing if there are ther factrs that may be relevant in determining independence (fr example, where an individual s sharehldings in an issuer is material); enhancing directr independence fr tightly-held and dual-class issuers, while fine-tuning the nuances f ur current apprach as it relates t widely-held issuers; augmenting the definitin f financial literacy s that it tracks mre clsely t sectin 407 f Sarbanes-Oxley Act f 2002 in the U.S.; and requiring all directrs r prpsed directrs t disclse circumstances and relatinships applicable t them that culd reasnably be perceived as material. 10 cmmenters wh were generally nt supprtive f ur current apprach prpsed certain changes, including: replacing the bright line tests with a mre principles-based apprach, allwing the bard t determine whether r nt the individual: is independent frm the issuer and its management; and has any ther relatinship, which in light f the circumstances, culd interfere with independent judgement; recgnizing that a relatinship with a cntrl persn r a significant sharehlder des nt, in and f itself, cmprmise independence; recgnizing that independence is a questin f fact that shuld be determined by the bard n a case-by-case basis; if the bright line tests are nt eliminated, the crprate gvernance regime shuld be updated t distinguish between directrs that have a relatinship with an issuer s management, and directrs that have a relatinship with the cntrlling sharehlder, but are independent f the issuer s management; replacing the bright line tests with enhanced disclsure f the criteria applied by bards in independence determinatins; prviding mre discretin t the bard in determining independence; the bright line tests f the current apprach shuld be turned int indicative criteria t leave mre flexibility t the bard; July 26, 2018 (2018), 41 OSCB 6011

6 Ntices / News Releases distinguishing between nn-independent directrs and related directrs in NP and Cmpanin Plicy CP Audit Cmmittees t allw greater participatin by related directrs n the bard generally and n bard cmmittees; prviding mre flexibility t allw: a directr related t a cntrlling sharehlder t serve n the issuer s audit cmmittee; r a nn-independent directr t serve n the audit cmmittee in circumstances where the bard determines that the directr is nt cnflicted and wuld be a qualified member; cnsidering whether an exemptin fr cntrlled cmpanies similar t the ne available frm NYSE requirements is apprpriate; amending NI as fllws: deleting the wrds and a parent f the issuer in subsectin 1.4(8); revising sectin 3.3 t prvide greater flexibility t include directrs related t a cntrlling sharehlder n the issuer subsidiary s audit cmmittee; and deleting paragraph 3.3(2)(e) regarding impartial judgment and best interests cncepts; and changing the fcus frm independence t legitimacy and credibility f bards f directrs. Advantages ADVANTAGES AND DISADVANTAGES OF MAINTAINING OUR CURRENT APPROACH VERSUS REPLACING IT WITH AN ALTERNATIVE APPROACH 17 cmmenters wh expressed general supprt fr ur current apprach have highlighted a number f advantages f maintaining the current apprach, including: preserving the cnsistency and predictability f an apprach that is well-understd by market participants; maintaining the alignment with the apprach applicable in the United States given the high degree f integratin f ur capital markets and the number f inter-listed issuers; aviding additinal csts fr issuers and effrts fr investrs t adapt t an alternative apprach; allwing investrs (including institutinal investrs) t quickly evaluate the level f independence n a bard; maintaining a higher standard fr determining independence; and maintaining investr cnfidence in the capital markets. Disadvantages 10 cmmenters wh were generally nt supprtive f ur current apprach highlighted a number f disadvantages f maintaining the current apprach, including: maintaining a ne-size-fits-all apprach that des nt enable issuers t take advantage f their unique strengths fr the benefit f all stakehlders; placing undue reliance n bright line tests t the detriment f a fuller and mre careful assessment f independence; and eliminating qualified individuals based n technical pints rather than the facts. July 26, 2018 (2018), 41 OSCB 6012

AMENDMENTS TO NASDAQ RULES ON COMPENSATION COMMITTEES

March 2013 AMENDMENTS TO NASDAQ RULES ON COMPENSATION COMMITTEES Summary. The Securities and Exchange Cmmissin recently apprved the fllwing amendments t the NASDAQ listing rules relating t cmpensatin cmmittees: