Comply or explain: enough of a push?

The Ontario Securities Commission seems poised to recommend that the province adopt a new “comply or explain” regime for public issuers in a bid to move companies to boost gender diversity on boards and in management. Despite iffy results elsewhere, it’s got widespread support
By Mark Anderson

Whatever is or isn’t on the table from the Ontario Securities Commission by the time you read this, any director, senior executive, corporate secretary, or governance or proxy adviser worth his or her salary will have already started thinking about and planning for a new board and senior management diversity regulatory regime come spring.

From the moment the OSC proposed new “comply or explain” regulations to promote greater gender diversity on public company boards and in senior management in July—following a pointed prompting from Ontario Premier Kathleen Wynne—it seemed likely its formal recommendations to the government, due before the end of 2013, would take a similar line. A critical mass in this country, evidently, has finally recognized that compulsory action is needed to correct the fact that women occupy a mere 10.3% of the board seats of S&P/TSX listed companies; a full 43% of companies have no women on their boards; a mere 14.5% of executive positions are occupied by women, and that only one in 20 chief executives is a woman.

Beatrix Dart, associate dean, Rotman School of Management: "Comply or explain the most compatible solution"

“I do believe that the OSC will be recommending the comply or explain solution,” says Beatrix Dart, associate dean at the Rotman School of Management at the University of Toronto, echoing the popular opinion at Listed’s press time. “It is the most compatible solution for the Canadian political environment—and presumably the corporate environment as well.”

More intriguing, perhaps, was how the proposed new rules would be received by the issuer community, and how much the OSC might be inclined to tweak its plans based on the feedback it received—particularly from those organizations and individuals that feel nothing short of quotas will be sufficient to fix the problem.

The OSC’s chairman Howard Wetston, executive director Maureen Jensen and their team certainly had a lot of input to work with. Formal comments on its proposals poured in and the September deadline for submissions was pushed back into October. In all, it received more than a hundred letters from leading corporations, business organizations, advocacy groups and law firms.

More affirming yet was the content of those letters: with rare exceptions, they supported the OSC’s proposed voluntary disclosure regime. That regime, to recap, would require issuers to annually reveal the number of women they have in their boardrooms and executive suites, as well as steps they’re taking to improve those figures. Companies would have to either comply with the disclosure requirements, or explain why they have opted not to address diversity.

Not coincidentally, the respondents were also near-unanimous in rejecting stronger measures such as mandatory quotas for female representation, arguing that quotas are too blunt an instrument, that they apply undue pressure on companies and risk stigmatizing women and reducing them to boardroom tokens.

Even advocacy groups such as the Canadian Society of Corporate Secretaries, the Women’s Executive Network, Women in Capital Markets and the Canadian Institute of Diversity and Inclusion—which might reasonably have been expected to support a quota system with tough sanctions for non-compliance—instead threw their weight behind the OSC’s comply or explain solution.

The submission from Women in Capital Markets president Jennifer Reynolds, which called comply or explain “a logical first step,” and “the most appropriate model for increasing gender diversity on boards and in senior management in Canada at this time,” was echoed by other advocacy groups as well as individual companies.

That’s not to suggest that all the respondents spoke with a single, united voice, or that support for the OSC’s voluntary disclosure model was in all cases unqualified. Alberta-based telecom giant Telus Corp. (TSX:T), for example, supported comply or explain regulations for the boardroom, but not the executive suite.

“As is the case in the United Kingdom, we believe that regulation should remain at the level of the board nomination process and board diversity,” wrote Telus’ chief legal officer Monique Mercier in her OSC submission. “We believe that our (management) diversity programs give us a competitive advantage…for that reason, we do not favour disclosure guidelines relating to such programs.”

Montreal-based engineering giant SNC Lavalin Group Inc. (TSX:SNC), by contrast, went the opposite direction, arguing that while comply or explain might be sufficient for the boardroom, stronger medicine was required for the executive suite. “We believe that without formal targets/quotas for senior management, the impact of real change will be minimal,” the company stated in a submission signed by both chairman Ian Bourne and CEO Robert Card.

And while both the Canadian Society of Corporate Secretaries (CSCS) and the Women’s Executive Network (WEN) endorsed the OSC’s voluntary disclosure model over quotas, they did so with markedly different arguments. While the CSCS felt that “quotas may result in under-qualified directors being appointed,” WEN argued that the supply of qualified women directors actually outstrips the demand. “The low demand is accounted for by the way boards recruit. Most director seats are filled by directors using their own networks, made up overwhelmingly of other white males.”

Indeed, the need to expand and “professionalize” the process by which directors and executives are recruited was a common theme among respondents, with several suggesting that the task of identifying suitable board candidates be turned over to search firms who could drum up women candidates, while others, such as the Women’s Legal Education and Action Fund, put forth the notion that companies be required to interview a minimum number of women for vacant executive positions, regardless of who eventually gets hired.

If there was one submission that raised eyebrows and landed like a large and rather ugly fly in the soup, it was that of the Ontario Teachers’ Pension Plan. It put itself squarely at the forefront of the group mentioned above which believes the proposals don’t go nearly far enough to make a difference.

“We are not convinced that a comply or explain regime will be ef- fective in achieving a measureable increase in the number of female directors,” wrote Wayne Kozun, Teachers’ senior vice-president of public equities, pointing out that other countries such as Norway had already tried such an approach, before moving to quotas in the face of weak voluntary compliance. Moreover, experiences in other jurisdictions had proven that without the threat of sanctions for non-compliance, “there was little increase in the number of women on boards.” For that reason, Teachers proposed a strict quota system to redress gender imbalances, whereby companies would be required to have at least three female board members by 2020, or be delisted from the Toronto Stock Exchange. “If you’re serious and you really want to make that difference…then set up [a quota],” Teachers’ CEO Jim Leech told an OSC roundtable in October.

As for the Canadian Coalition for Good Governance, it says you don’t even have to look overseas to find reasons to doubt the efficacy of comply or explain. After all, a similar model was implemented by the OSC in December 2012 to encourage companies to adopt majority voting practices, with limited success. “Many companies have not adopted majority voting and disclose as their ‘explanation’ that there is no legal requirement for them to do so,” the coalition noted in its letter to the OSC. “With this in mind we suggest that gender diversity be monitored and reported on annually with a view to considering more proscriptive action if progress proves unsatisfactory.”

This, of course, is exactly what Teachers predicts will happen, and why it advocates skipping the “intermediate step” of trying a voluntary disclosure regime for three or four years, before being forced to move inevitably to quotas.

In this, however, Teachers stands largely alone: for better or worse, the rest of corporate Canada appears willing to give comply or explain the benefit of the doubt when it comes to redressing gender inequality—even if those doubts are all-too-firmly grounded in experience and history. In 2014, the test of that tenuous faith will begin playing out in real time.

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