Capital Markets Modernization Taskforce recommendations
Part 3: ESG, diversity and governance

The Capital Markets Modernization Taskforce was established in February 2020 and mandated to make recommendations to modernize Ontario’s capital markets regulation. An initial report was published in July 2020 for consultation and received significant feedback. A product of input from over 110 stakeholders, the taskforce released its final report on January 22, 2021.

In Part 3 of this series we outline recommendations aimed at modernizing board governance, increasing transparency, and enhancing shareholder democracy.

Board composition and governance

Many commentators supported board diversity and renewal and enhanced disclosure of corporate governance practices. The taskforce recommends implementing the following corporate governance requirements for public issuers:

• Corporate board diversity requirements: The taskforce’s recommendations to improve board diversity include requiring public issuers to set diversity targets for board members and named executive officers for those who self-identify as women, BIPOC, persons with disabilities and LGBTQ+. Issuers would be required to set implementation timelines and provide annual data. While issuers would be responsible for setting their own targets, the taskforce recommends that issuers aim for 50% women and 30% BIPOC, persons with disabilities and LGBTQ+ representation, to be implemented over five years for representation of women on boards, and seven years to meet representation targets for other diversity groups. The taskforce recommends the public adoption of a written policy regarding director nominations that specifically addresses diversity initiatives.
• Board tenure limits: The taskforce recommends a 12-year tenure limit for most board members, subject to exceptions for the chair of the board and one non-independent director, who may serve for 15 years. The taskforce also recommends an exemption for non-independent directors of family-owned and -controlled businesses where such individuals represent a minority of the board.
• Mandatory say-on-pay votes on executive compensation: The taskforce recommends implementing mandatory non-binding annual advisory votes on executive compensation for all public issuers.
• Mandatory annual director elections and majority voting in uncontested elections: The taskforce recommends the annual and individual election of directors. The taskforce recommends a majority voting requirement in uncontested elections. Although some issuers are subject to these requirements as a result of TSX rules, and more may be affected by pending amendments to corporate law, the taskforce recommends making these policies mandatory for all public issuers in Ontario.

Increased transparency for issuers and shareholders

• Mandatory ESG disclosure: The taskforce recommends that Ontario adopt the TCFD reporting framework related to governance, strategy and risk management (subject to materiality). The recommendation would require disclosure by all reporting issuers of “Scope 1,” “Scope 2,” and, if appropriate, “Scope 3” greenhouse gas emissions on a “comply-or-explain” basis. Scope 1 refers to direct GHG emissions; Scope 2 refers to indirect GHG emissions from purchased energy; and Scope 3 refers to indirect GHG emissions not covered by Scope 2. The taskforce recommends a two-year transition period for implementation for issuers with a market cap above $500 million; a three-year transition period for issuers with a market cap between $150 and $500 million; and a five-year transition period for smaller issuers with a market cap below $150 million.
• Early-warning reporting disclosure at 5 per cent: The taskforce heard feedback that the 10 per cent early-warning threshold does not provide adequate transparency for issuers or investors. The taskforce recommends that non-passive investors (i.e., those who intend to make a take-over bid, propose a transaction that would result in an investor gaining control of an issuer, or solicit proxies against any director nominee or proposed corporate action) be required to file a news release and early-warning report upon crossing the 5 per cent beneficial ownership threshold.
• Reporting issuers to obtain beneficial ownership data: Reporting issuers are only able to obtain partial shareholder information under the current system. The taskforce recommends that public companies and other reporting issuers be able to obtain the identities and holdings of all beneficial owners of their securities. This recommendation reflects concerns that issuers have a limited ability to engage in direct dialogue with their investors, and that issuers have inadequate insight into how intermediaries transmit proxy and other voting materials. 
• Strengthening the role of independent directors in conflict of interest transactions: The taskforce recommends adopting the best practices described in Multilateral Staff Notice 61-302 and its companion policy, which regulates the significant conflict of interest transactions. This would strengthen the role of independent directors and mandate the formation of independent committees to oversee material conflicts of interest.

In Part 4 of this series we will outline the taskforce’s recommendations for the securities law enforcement regime.

The taskforce’s final report can be accessed here: https://www.ontario.ca/document/capital-markets-modernization-taskforce-final-report-january-2021