The Ontario Securities Commission (OSC) should be congratulated for addressing gender diversity last week. Other than Quebec, the addressing of boardroom and senior management diversity (beyond gender) has been long overdue in Canada.
However, the central thrust of the proposal is a “policy” that listed companies may – or may not – draft; and that listed companies may – or may not – disclose. Measureable objectives within the policy may – or may not – occur. These requirements are very wishy-washy. This is an overly tempered, passive and permissive approach.
The OSC’s approach was said to be modeled off of the Australian one, but it was not in several dimensions, as I read things. The Australian approach actually defined diversity, which goes beyond women, and holds companies responsible for setting measureable objectives and reporting specific progress against their achievement. There are several content suggestions Australia provided as well. The UK's approach to diversity is also stronger than the OSC’s, as are several countries in Europe.
A “policy” approach with insufficient guidance is unwise. The Americans adopted this approach with regard to diversity and it has been an abject failure. Clever lawyers can craft well sounding polices that are so general that it is virtually impossible not to comply with them. I remember one case where a NYSE company lawyer (a white male) actually tried to convince me that eleven all-white-male directors were, indeed, diverse because all the men had a diversity of “perspective” and “opinion.” This is what happens when regulators are passive or complacent.
This is part of a larger issue with the OSC, and that is inadequate articulation of principles and practices within its overall corporate governance framework. Other than disclosure, here, which is in turn modeled off of guidelines for publicly-listed companies, the actual guidelines are a mere four pages. They have not been updated since the financial crisis and are outdated, originally drafted in 2004 and approved in 2005.
For example, the approach to risk management within this National Policy is only two lines. (See 3.4 (b) and (c) here.) This hardly captures what has happened in the field of risk governance best practice since 2008. I advised a company last week that had a massive risk management failure and the word “risk” is not even mentioned in the vast majority of its governance terms of reference documents. This is hardly surprising given the OSC’s approach to risk itself.
The superficial approach to strategic planning and value creation is similar (See 3.4 (b) here.) A TSX board must simply “adopt” a strategic planning process [what exactly is a “strategic planning process”?], and approve a strategic plan once a year that takes into account the risks of the business. It is hardly surprising that strategy gets short shrift in many boards, my research suggests.
Without guidance, any policy, approach, or plan, or even a director “competency” can mean whatever the drafter [usually management or an advisor beholden to them] wants it to mean. This is precisely where blockage, entrenchment, and ultimately decision-making failure can and does occur.
What the OSC should instead do is move towards a comprehensive framework of governance (i) principles and (ii) practices that achieve the objectives of the principles, which other jurisdictions use. A series of succinct almost binary guidelines is simply inadequate and naive. Other jurisdictions, such as the UK, South Africa and EU have far more comprehensive principle and practice approaches, which guide companies when they comply or explain. A set of recommended practices, when it comes to diversity for example, can be pointed to by progressive directors or investors. And it is not an excuse that comprehensive principles and practices cannot be crafted because of the variety of Canadian companies. South Africa has just as great a variety of companies, and its King III Code, which is one of the most comprehensive in the world, applies to all types of companies, including: listed, private, not profit and state owned. Principles and practices is a drafting exercise and require work.
Without principles and practices, other initiatives such as diversity are bootstrapped onto inadequate guidelines.
Take individual competencies and skills of directors for example, which relate to diversity. TSX companies should recruit directors on the basis of “competencies” and “skills” (see sections 3.12 - 3.14 here), but nowhere are “competencies” or “skills” defined, nor are examples of competencies or specific expertise suggested. Other Canadian regulators (including ones I have advised) are more specific in articulating what expertise directors are expected to possess, offering comprehensive frameworks and practices, including for risk management.
Otherwise, a company is free to draft fluffy guidelines, policies, charters, and so on, that are largely public relations exercises or designed to keep the power with management, rather than designed to advance the spirit of what the regulator intended. They ultimately have limited force or effect. They are designed to protect and forestall. Many of the companies I research who have failed have similar fluffy policies. Retained management lawyers perpetuate this with cut and paste precedent exercises spread amongst their clients.
Without sufficient guidance provided by a regulator, short bios occur; or it is simply stated that a director possesses a given competency, without articulating how and when the competency was acquired. What happens here is that women are short-shrifted as they are alleged not to have the experience or the qualifications when they may or do. Second, guidance can be offered on how directors should come to be selected for membership, including interviews, short-lists, advertisements and so on, as other jurisdictions are doing.
In my next blog, I will outline specific defects of the above OSC’s proposed policy, in accordance with best practices other jurisdictions have adopted.