Navigating corporate governance for venture issuers in Canada – Part 1: board composition, board committees and essential policies for robust corporate governance
Embarking on the journey of going public on the TSX Venture Exchange (the “TSXV”) or the Canadian Securities Exchange (the “CSE”) in Canada is a momentous step for emerging companies (also referred to as “venture issuers”). This transition opens up new avenues for capital acquisition and provides access to a broader spectrum of investors. However, with this change comes a set of pivotal responsibilities, especially in the realm of corporate governance. To ensure a seamless transition and instill confidence among stakeholders, venture issuers must meticulously consider corporate governance factors.
This two-part article will delve into the specific aspects that companies listed on the TSXV or the CSE should bear in mind as they navigate through the intricacies of corporate governance in Canada. This first part is focused on the essential components of board composition, key functions of board committees, and the adoption of essential procedures and policies which form the foundation of effective corporate governance.
1. The board of directors
The board of directors plays a pivotal role in guiding and overseeing a company’s activities and operations. As such, the composition and structure of the board are critical considerations as companies transition into the public realm. Given the amplified visibility and scrutiny from regulatory authorities, shareholders, and other interested parties, adopting enhanced corporate governance practices is not just prudent but essential.
1.1. Composition, qualifications and independence
When structuring the board of directors, several factors come into play. These factors notably include having a well-balanced mix of certain attributes, such as experience, skills, diversity, and independence to ensure the board can have informed opinions on all the relevant aspects of the company to wisely advise management and satisfactorily perform its oversight duties. In particular, exchanges will require that directors meet certain applicable minimum requirements, which notably include adequate experience and technical experience relevant to the company’s business and industry, and adequate reporting issuer experience in Canada or a similar jurisdiction (TSXV Corporate Finance Policies, Policy 3.1 / CSE Policy 4).
Nonetheless, the specific structure of the board will also depend on the company’s incorporating act and the exchange on which it is listed. In Québec, most companies will be incorporated either under the Business Corporations Act (Québec) (the “QBCA”) or the Canada Business Corporations Act (the “CBCA”) which serve as the baseline for board composition. The CBCA and the QBCA require a public company to have a board composed of at least three directors, two of whom must not be officers or employees of the company or its affiliates. In addition, under the CBCA, a minimum of 25% of the directors must be Canadian residents. The QBCA has no residency requirements for directors.
Certain corporate governance best practices for public companies are set out by National Policy 58-201 – Corporate Governance Guidelines (the “NP 58-201”). According to NP 58-201, a majority of a public company’s board of directors and the chair of a public company’s board should be independent. If it is not suitable for a company to have an independent director as chair, then it may be of interest to appoint an independent director as a lead director considered to be the effective leader of the board. It should be noted that NP 58-201 refers to a higher independence standard than the non-management requirement of the CBCA or QBCA referred to above. For instance, an individual who has a “material relationship” with the company in a manner that is reasonably expected to interfere with the exercise of his independent judgment is not considered independent under applicable Canadian securities law. Ideally, regularly scheduled meetings at which non-independent directors and members of management are not in attendance should be held by independent directors to facilitate open and forthright discussions.
Furthermore, TSXV and CSE-listed companies must also comply with such exchange listing requirements, which notably include some qualitative standards or guidelines regarding corporate governance that are generally akin to those established by NP 58-201.
In short, the board composition, qualifications and independence requirements outlined above ensure that boards operate with objectivity and make informed decisions in the best interests of the company and its shareholders, free from any potential undue influence that may come from interested parties.
1.2. Board committees
In addition to the overall board composition, companies commonly establish by resolution various committees to assist the board in its functions and enhance corporate governance. These committees include:
- Audit committee. The board of a public company is generally required by corporate law and by National Instrument 52-110 – Audit Committees (the “NI 52-110”) to establish an audit committee composed of at least three members to which it delegates certain duties pertaining to the oversight of financial reporting. As such, the audit committee is responsible for tasks such as recommending the nomination and compensation of the external auditor and overseeing its work, reviewing the financial statements, management’s discussion and analysis (MD&A), and press releases referencing financial results before they are publicly disseminated.
In accordance with the terms of NI 52-110, the mandate and responsibilities of the audit committee must be set out in a written charter that will need to be included in the management information circular during the solicitation of proxies. Subject to certain prescribed exemptions, companies must have a majority of audit committee members that comply with the independence criteria, and all members must be “financially literate”.
- Compensation committee. NP 58-201 recommends the creation by the board of a compensation committee focused on reviewing corporate goals and objectives related to executive compensation, including officers and directors.
- Nominating / Corporate governance committee. A nominating committee (sometimes referred to as the corporate governance committee) can also be put in place to comply with the best practices of NP 58-201. Composed entirely of independent members, this committee is responsible for identifying individuals qualified to become new board members and assessing the competencies and skills of each existing director and of the board as a whole to ensure effective corporate governance.
As recommended by NP 58-201, the compensation and nominating committee both should be composed entirely of independent members and have a written charter that clearly sets out, among other things, their purpose, responsibilities, member qualifications, member appointment, removal, and manner of reporting to the board to ensure these committees operate in a manner coherent with their respective mission and aligned with the overall goals and vision of the company. These standing committees ensure specialized oversight, contributing to transparency and accountability in corporate governance practices.
To the extent permissible, the board of a public company may put in place other types of committees based on their needs (e.g. technical committee (especially for mining companies), ESG committee, risk committee). In certain specific circumstances, applicable securities law may require or encourage the formation of a special committee to advise the board in the context of an important event, such as in a major transaction.
2. Policies for robust corporate governance
2.1. Adopting essential policies
Corporate governance extends far beyond the structure of the board and its committees. Public companies should establish a comprehensive suite of policies to guide their conduct and ensure compliance with certain regulatory requirements. These policies include:
- Insider trading policy. Securities laws in Canada impose strict prohibitions on insider trading, tipping, and recommending trades in the securities of the issuer. It is imperative to implement a robust insider trading policy that not only summarizes these prohibitions but also delineates the types of information that may be considered material. The policy should provide guidance on circumstances in which management or employees can disclose material information in the necessary course of business and define blackout periods to prevent insider trading.
- Code of business conduct and ethics. In order to dissuade wrongdoing and promote integrity, companies are encouraged to adopt a code of business conduct and ethics (a “Code”) that should apply all across the organization. Such Code typically covers proper use of corporate assets and opportunities, compliance with laws and regulations, disclosure of conflict of interests, fair dealing with stakeholders, and the reporting of unethical or illegal behaviour. If a company has adopted or amended a written Code, it must file a copy of its Code on SEDAR+ no later than the date on which its next financial statements are required to be filed.
- Board charter. Companies should adopt a written mandate or charter in virtue of which the board explicitly acknowledges its responsibility for the stewardship of the company, including responsibility over the following aspects as described by NP 58-201:
- to the extent feasible, satisfying itself as to the integrity of the chief executive officer and other executive officers and that the CEO and other executive officers create a culture of integrity throughout the organization;
- adopting a strategic planning process and approving, on at least an annual basis, a strategic plan which takes into account, among other things, the opportunities and risks of the business;
- identifying the principal risks of the company’s business, and ensuring the implementation of appropriate systems to manage these risks;1
- adopting a communication policy for the company;
- succession planning (including appointing, training and monitoring senior management);
- the company’s internal control and management information systems; and
- developing the company’s approach to corporate governance, including developing a set of corporate governance principles and guidelines that are specifically applicable to the company.
Furthermore, NP 58-201 adds that the board charter should also set out measures for receiving feedback from stakeholders (e.g., the board may wish to establish a process to permit stakeholders to directly contact the independent directors) and expectations and responsibilities of directors, including basic duties and responsibilities with respect to attendance at board meetings and advance review of meeting materials. While not mandatory for venture issuers under NP 58-101 – Disclosure of Corporate Governance Practices, all companies should disclose the text of their board charter to promote transparency.
2.2 Tailoring additional policies
While the above-mentioned policies form a foundational framework for corporate governance, companies may also consider adopting additional policies tailored to the nature of their industry, activities, or global scope. A whistleblower policy, an anti-corruption policy, a social media policy, and a disclosure policy are just a few examples of additional specific policies which may be implemented. Collaboration with a legal counsel is essential to help identify additional policies that may be necessary, ensuring that the company’s governance framework is comprehensive and compliant on every level with relevant regulations.
2.3. Oversight and responsibility
To ensure the effectiveness of these policies, a senior officer should be tasked with monitoring their implementation and efficiency. By frequently reporting to the board, this senior officer will play a crucial role in ensuring that the company adheres to its governance commitments and maintains a culture of compliance.
Strong corporate governance is one of the pillars upon which the lasting success of a venture issuer rests. It instills confidence among shareholders and stakeholders, reduces overall risks and fosters responsible management. In turn, this attracts investment, promotes innovation and enhances the reputation of the company which all ultimately play a key role in creating value. Adopting best governance practices should therefore be a priority for all publicly traded companies.
Stay tuned for the second part of this article, which will notably cover ESG trends to help you keep abreast of the latest developments in the ever-evolving landscape of Canadian corporate governance.
1 In today’s digital age, cybersecurity is paramount considering the risks associated with cyber incidents. the board charter should therefore specifically address this issue by outlining the appropriate systems to manage cyber risks. To read more on this subject read our article Cybersecurity Is Also a Question of Governance.