July 1, 2023

Memorandum of IGOPP on Regulations 58-101 and 58-201

Consultation on the Draft Regulation to amend Regulation 58-101 respecting Disclosure of Corporate Governance Practices and the Draft Amendments to Policy Statement 58-201 to Corporate Governance Guidelines

François Dauphin and Patric Besner | Institute for governance (IGOPP)

“Any organization governed by a board of directors must strive to constitute a board that is both legitimate and credible.”[1] A board’s credibility is indispensable to its effectiveness and “[its] credibility is measured not only by its in-depth knowledge of the company’s industry and its markets, of its business model, and its value-creation drivers, but also by the integrity and the trustworthiness of its board members.”[2]

Board members have responsibilities and must comply with obligations that are particularly important in a highly regulated environment. The resulting disclosure of information is analyzed by numerous stakeholders with sometimes divergent objectives and interests. The issue of diversity in the composition of a board is now a major concern, a criterion which can sometimes even influence the nature of the votes cast when electing certain members.

Beyond social recognition and legitimacy, a board consisting of members with varied social and personal attributes can contribute to a greater diversity of skills and perspectives. In addition, a diverse board has many potential benefits, such as: 1) helping to bring in more diverse knowledge and points of view; 2) mitigating the risk of groupthink; 3) demonstrating and fostering a more inclusive corporate culture; 4) helping provide a broader view of risk management, and; 5) contributing to better brand and corporate reputation by aligning its stated values with its actions.

The literature also shows that recruitment and employee retention are facilitated when the forms of diversity present are representative of employees and the population of the main communities in which a company operates—at its highest echelons.

Given the importance of this issue, it is essential for boards to ensure that diversity is fully integrated and encouraged at all levels of the organization by insisting on these aspects with management, making the latter accountable for achieving levels of representativeness— established jointly with management based on the company’s reality—among employees and in management positions at every level.

In our research into diversity disclosure, the main benefit that emerged was a demonstrated willingness to consider diverse candidates when selecting new members. In fact, as early as the second year of mandatory disclosure, there was a notable increase in the percentage of new members from diverse backgrounds, particularly from visible minorities, among the largest listed companies. This determination is also evident in the explanatory texts accompanying the disclosed diversity data.

The importance of “broader” diversity illustrates the evolution of civil society’s expectations of its major institutions. Major listed companies are now observed and scrutinized through the prism of these new expectations, where their role and responsibilities toward stakeholders and civil society in general are now perceived (rightly or wrongly, depending on the case) much more widely. Some large institutional investors are also acting as watchdogs of listed companies in this respect.

The issue of board diversity is, however, not new. Academics have been interested in the question for several decades, especially if all the research into group dynamics is included. The benefits of diversity are obvious and go far beyond the simple desire for companies to retain a form of social legitimacy by conforming to minimum expectations. However, for these benefits to be fully realized, the issue of diversity needs to be approached thoughtfully; it needs to be contextualized.

Issuers need to take a pragmatic approach to this issue, in line with their organization’s current and future strategy. Diversity must be fully embraced and instilled as a belief. This is how a real climate of inclusion will be fostered at all levels of society. It is also from this perspective that we have analyzed the question and the draft amendments submitted as part of this Notice of Consultation.

[1] Allaire, Y. The Independence of Board Members: A Quest for Legitimacy, Policy Paper no. 3, IGOPP, September 2008

[2] Allaire, Y. Board Members Are Independent but Are They Legitimate and Credible? Policy Paper no. 10, IGOPP, 2018