A sign board displays the TSX at close in Toronto on March 16, 2020.Frank Gunn/The Canadian Press
Ed Waitzer is a lawyer and previous chair of the Ontario Securities Commission.
Last month, the Canadian Securities Regulators asked for comment on two different approaches to diversity disclosure requirements.
Both proposals would expand diversity disclosure with respect to corporate boards and executive management – beyond just for women, which is currently mandated – and are intended to provide investors with “decision-useful” information tying diversity to corporate strategy. But the proposals contrast greatly in what they require of companies.
One approach would only require corporations to describe their diversity objectives, how they propose to achieve them, and how they will measure progress.
The second approach would mandate specific reporting on the representation of five historically under-represented groups (Indigenous peoples, LGBTQ persons, racialized persons, persons with disabilities and women). That is, companies would have to collect and then disclose detailed demographic makeup of their board members, but (for reasons that aren’t obvious) not their executive officers. A version of this latter approach was recently adopted under the Canada Business Corporations Act (not including LGBTQ persons).
For now, at least, it is the first approach that the CSA should be adopting.
The first approach is less prescriptive, based on the view that securities regulators shouldn’t select categories of diversity or reduce disclosure to standardized metrics. It is intended to encourage corporations to think about and explain their approaches to diversity. For boards that take diversity seriously, this encourages them to explain their engagement, rather than just gaming the numbers.
This debate – between standardized or corporate driven governance disclosures – has been central to governance reforms for years. It has spawned a cottage industry of “governance professionals” who advise on, collate, analyze and provide rankings based on disclosure requirements. Not surprisingly, they (and the investor community) tend to favour the standardized disclosure of the second approach, which is easier to deal with in terms of consistency and the appearance of objectivity.
But governance is highly contextual and defaulting to standardized metrics inevitably leads to a gaming of the metrics and “dumbing down” of governance requirements. It also imposes an obligation on corporations to ask their people to self-identify – an imprecise and, for some, uncomfortable process.
Canada trails U.S. significantly in corporate diversity
The reality is that norms about diversity (and, more generally, a range of other environmental, social and governance standards) are evolving rapidly – which the CSA wants to encourage. Ideally, such norms should become embedded in corporate cultures that support business objectives (such as creating more effective talent pipelines), rather than yet another mechanical compliance requirement.
Imposing specific and standardized disclosure requirements inevitably narrows that process for corporations and investors alike. We’ve seen this play out in respect of environmental, social and governance ratings – with different reporting requirements and substantial disagreement among the advisory firms as to what they choose to measure, what indicators they use, and how they weigh the relative importance of those indicators.
Ideally, requiring more diverse, nuanced and robust disclosure, while more challenging, should encourage more disciplined thinking about what corporations do and why and whether that meets the expectations of their stakeholders (including, but extending beyond, the investor community). Defining objectives, determining how best to achieve and measure progress and reporting in a manner that encourages similar introspection and action by stakeholders should accelerate progress toward more enduring diversity goals.
Sadly though, based on experience to date with gender diversity disclosure, many boards aren’t willing to embrace that challenge yet and may choose to duck rather than engage in a substantial disclosure process. Boilerplate disclosure, typically along the lines of “we base everything on merit,” should be unacceptable.
Perhaps the CSA should focus on this challenge, by making it clear that they expect substantive narrative disclosure and will be actively monitoring the quality of corporate reporting on this issue. If corporations demonstrate their commitment to “thinking through” diversity objectives, such narrative disclosure will have achieved much more than selective quantitative information can. If not, the CSA should commit to reconsidering disclosure requirements after an appropriate amount of time.
The first chair of the U.S. Securities and Exchange Commission (and a Supreme Court judge) W.O. Douglas talked about encouraging market participants to “buy in” to the goals of regulation and their own stake in it. He said that “by and large government can operate satisfactorily only by proscription … leaving untouched large areas of conduct … in the realm of ethics and morality” in which self-government alone can effectively reach.
When it comes to promoting diversity, this may be an opportunity to see if the corporate sector is prepared to meet public expectations in a thoughtful and substantial way. If not, they are likely to bring additional regulation upon themselves.