How do I modify my corporate governance procedures to improve
long-term financial performance, while also improving
environmental, social and governance (ESG) performance? On Feb. 22,
2021, Peter Dey and Sarah Kaplan answered this question in their
report entitled “360o Governance: Where are the Directors in a World in
Crisis?” (360o Governance).
Released by the University of Toronto’s Rotman School of
Management, 360o Governance provides a set of 13
corporate governance guidelines aimed at giving clarity on how
boards can effectively consider the interests of all stakeholders
and the rights of Indigenous Peoples in their decision making.
Background: The origins of Canadian corporate governance best
practices
360o Governance borrows its framework heavily from
Peter Dey’s influential Report of the Toronto Stock Exchange
Committee on Corporate Governance in Canada titled “Where Were
the Directors?” (the Dey Report).
Similar to the Dey Report, the guidelines do not mandate action
by the board. Rather, they follow the same “comply or
explain” approach to implementation that was used in the Dey
Report.
Both the Dey Report and 360o Governance include a
background section that frames the problem they are trying to
address, before articulating a set of 13 corporate governance
guidelines designed to help address those problems.
Dating back to the early 1990s, the Dey Report noted that there
was skepticism among public shareholders regarding the adequacy of
corporate governance of many public companies, and concluded that
had corporations been more effectively governed, the risk of these
recent corporate failures and the magnitude of losses that occurred
would have been significantly reduced.
The Dey Report concluded that effective corporate governance
will, in the long term, improve corporate performance and benefit
shareholders. Improved corporate performance is both in the best
interests of shareholders and serves the public interest as
well.
The report’s impact was immediate. The Dey Report was
subsequently adopted by the Toronto Stock Exchange, mandating that
TSX-listed companies disclose annually whether and how the board of
directors adhered to the 13 corporate governance guidelines (the
TSX Governance Guidelines).
The TSX Governance Guidelines were in force from 1995 to 2005.
In 2005, the Canadian Securities Administrators (the CSA) adopted
the CSA Governance Guidelines, which expanded on and replaced the
TSX Governance Guidelines. Today they include National Policy
58-201 – Corporate Governance Guidelines and National Instrument
58-101 – Disclosure of Corporate Governance Practices.
The policy rationale for the CSA Governance Guidelines is
consistent with the policy rationale that underlined the
recommendations in the Dey Report. That is, to provide the
investing public with information and transparency concerning the
corporate governance practices of an issuer so that investors can
make informed investment and voting decisions in respect of a
particular issuer.
With this history, it is not surprising that 360o
Governance suggests near the end of the prologue that:
[W]e believe that boards of directors of all companies need
to address and respond to the issues raised by the guidelines. We
also anticipate that legislative or regulatory bodies may also seek
to enact regulations or laws requiring compliance. It is our hope
that these guidelines will serve as both a useful resource and an
inspiration to corporate Canada and help lead Canada into a
prosperous 21st century.
360o Governance: Adopting a stakeholder-centric view
of corporate governance
In 2004, the Supreme Court of Canada affirmed that directors owe
their fiduciary duty solely to the corporation, and not to any
particular stakeholder group, in Peoples Department Stores v
Wise.
In 2008 in BCE Inc v 1976 Debentureholders the Supreme
Court went further, noting that in considering what is in the best
interests of the corporation, directors may look to the interests
of, inter alia, shareholders, employees, creditors,
consumers, governments and the environment to inform their
decisions.
While courts have generally shown deference to business
judgement, stakeholders play an important role in Canadian
corporate governance law.
Section 122(1.1) of the Canada Business Corporations
Act states:
Best interests of the
corporation
(1.1) When acting with a view to the best interests of the
corporation under paragraph (1)(a), the directors and officers of
the corporation may consider, but are not limited to, the following
factors:
(a) the interests of
(i) shareholders,
(ii) employees,
(iii) retirees and
pensioners,
(iv) creditors,
(v) consumers, and
(vi) governments;
(b) the environment; and
(c) the long-term interests of
the corporation.
Historically, Dey and Kaplan note, the shareholder has occupied
a large share of the board’s attention. Their guidelines are
intended to elevate the status of other stakeholders in the
board’s minds rather than reflect a bias against the
shareholder.
In this context, 360o Governance begins by noting
that “the year 2020 is forcing a reckoning about the role of
the corporation in society, and along with it, the responsibilities
of boards of directors to the corporation’s myriad
stakeholders.”
Drawing in part from Kaplan’s 2019 book titled The
360o Corporation: From Stakeholder Trade-offs to
Transformation, Dey and Kaplan make the case for boards to
take a broader ESG and stakeholder-centric view of corporate
governance.
While acknowledging that corporations contribute jobs,
innovation and economic growth to our country, Dey and Kaplan note
that corporate operations have also contributed to creating or
exacerbating social and environmental problems including climate
change, income inequality, gender inequality, and the opioid
crisis.
Dey and Kaplan note that:
- Given the severity of these problems, governments at all levels
are changing the regulatory and legal rules applicable to Canadian
corporations. - Investors are showing an interest in a firm’s broader ESG
performance, with more than 30 per cent of investments now held in
an ESG vehicle or something similar, a proportion that is estimated
to grow to 50 per cent by 2050. - Recent research shows that companies that adopt formal
sustainability policies and those with higher ESG ratings tied
specifically to material impacts have better financial returns than
their peers. - High ESG scores are now a competitive advantage in the war for
talent. - Customers are also demanding that their suppliers respond to
societal challenges, in both the business to client (B2C) and
business to business (B2B) space. - Climate change creates risks that can have a material impact on
financial performance. An increasing number of companies are
reporting material effects on earnings caused by weather-related
damages to physical plant or supply chain disruptions.
The thirteen guidelines
In this context, Dey and Kaplan present their 13 guidelines to
form the basis of modern Canadian board competencies.
The guidelines were drafted to apply to all organizations,
regardless of their legal form, and not just large, publicly traded
companies.
The guidelines incorporate guidance already offered by other
prominent organizations in Canada and around the world, such as the
UNPRI (Principles for Responsible Investing), the Canadian
Coalition for Good Governance, the Taskforce on Climate-related
Financial Disclosure (TCFD), the Reconciliation & Responsible
Investment Initiative, the Institute for Corporate Directors, the
Canadian Gender and Good Governance Alliance, the World Economic
Forum’s 4Ps (principles of governance, planet, people,
prosperity), the Ontario Capital Markets Modernization Taskforce,
the United Nations “Protect, Respect and Remedy”
Framework, the OECD Guidelines for Multinational Enterprises and
many others.
The guidelines are as follows:
- Corporate purpose: Establish a corporate
purpose that addresses all stakeholders. - Board’s duty: Emphasize the board’s
duty to exercise its powers in the long-term best interests of the
corporation, which by necessity considers the interests of all the
corporation’s stakeholders. - Definition of stakeholders: Clearly define the
stakeholders that contribute to the operation of the
corporation’s business or could be impacted by those operations
by assessing the impacts of the corporation’s products or
services across their lifecycle. - Indigenous peoples: Many Indigenous peoples
reject the designation “stakeholder,” which implies their
interests may be balanced with other interests. In this context, it
is important for boards to understand the unique history and
special rights of Indigenous peoples, as well as the need for
engaging with and, if appropriate, getting their consent. - Reporting on stakeholder impact: Integrate
reporting of stakeholder impacts as part of annual reporting, which
is supported by metrics designed to track and prove progress. - Stakeholder committee: Establish a separate
stakeholder committee to oversee the veracity of the reporting on
stakeholder impact and to have a larger strategic responsibility to
monitor stakeholder interests and the related risks and
opportunities. - Stakeholder conflicts: In the event of
conflict among different stakeholders, develop processes designed
to ensure that competing interests are identified and considered,
with an objective of treating all stakeholders fairly. - Compensation policies: Ensure that management
compensation is aligned with achieving the corporate purpose and
the long-term sustainability of the corporation. - Board refreshment: To ensure that boards gain
the competencies and diverse perspectives needed to address these
21st century challenges, adopt rigorous processes of board
refreshment, including term limits, and revised skills matrices for
assessing current board members or recruiting new ones. - Board diversity: Develop targets for the board
that include the appropriate mix of backgrounds and lived
experiences, representative of the communities in which the
corporation operates. Include targets for representation of women
on the board and track progress towards those targets, and report
on representation of other underrepresented groups including
Indigenous Peoples, persons with disabilities, and members of
visible minorities. - Organizational diversity: Establish clear
policies, specific targets and timelines for achieving diversity
throughout the organization through better representation of women,
visible minorities, Indigenous peoples, people with disabilities
and other underrepresented groups. - Climate change: Develop and disclose its
policy for addressing climate change and climate related-risks and
opportunities, as well as disclosure of the processes by which
board committees consider climate-related issues when reviewing
strategic choices and how the board monitors and oversees progress
against goals and targets for addressing these issues. - Corporate activism: Ensure a process is in
place for the board and CEO to identify and deliberate about key
issues with social or political implications, and, if agreed, for
the corporation – typically through its CEO – to state its position
on key issues.
Takeaways
360o Governance provides practical step-by-step
guidelines that boards, management and companies can implement to
address stakeholder impacts and, ideally, improve ESG
performance.
It introduces a systematic approach to stakeholder interests and
a stakeholder-centric view of corporate governance that compliments
and expands beyond the shareholder-focused concerns that gave rise
to the original Dey Report.
Smaller companies (publicly traded or not) may be concerned that
they simply do not have the resources to take on more governance
responsibilities, or that additional governance requirements might
dampen innovation or entrepreneurship.
However, good governance can help all corporations, including
smaller companies, gain credibility, enhance their reputation,
attract talent, gain access to capital on better terms, appeal to
customers, prevent fraud or other unethical behaviour and withstand
market shocks.
In this way, 360o Governance is an opportunity rather
than a burden.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
