Stock Market Regulations and Your Board of Directors

Shelagh Donnelly
6 min read

Corporate secretaries and other governance professionals in Canada and the U.S. share many career commonalities. It’s not unusual for governance professionals in any given province or state to have networks that cross both domestic and international borders, or to share best practices with a counterpart from our neighboring country.

There are divergences, though, and these are particularly notable when it comes to support of a publicly traded board impacted by stock market regulations. These variations are driven in no small part by the two countries’ approaches to corporate governance.

When asked to describe corporate governance to someone not involved in the career, you might characterize it as somewhat of an equivalent to the National Hockey League’s (NHL’s) or Major League Baseball’s (MLB’s) Official Rules. For those interested in more than the short answer, you may find yourself expanding on corporate governance as the relationship between shareholders and not only a board’s directors, but also the senior management of a corporation. Accountable to their investors, boards and corporations turn to governance to establish and articulate each party’s duties and the scope of their respective authorities. Corporate governance establishes the ground rules for how corporations govern themselves.

Canada’s Corporate Governance Approach

Canada’s approach to corporate governance is not inconsistent with practices in Australia, Europe and the United Kingdom. Canadian corporate governance is principles-based, and investors assess the caliber of a corporation’s governance practices. The case for a principles-based approach? It’s seen as enabling parties to readily adapt to changing market conditions, by providing guidance while promoting the use of professional judgment in responsible decision-making. It’s seen as both flexible and robust, in that the guidance may be applied to multiple scenarios without being prescriptive. This does not negate expectations of compliance; Canadian corporations are required to “comply or explain.”

Corporations and their boards must adhere to legislation in the form of the Canada Business Corporations Act (CBCA). Corporate board directors are expected to know the law and their responsibilities as detailed in the legislation, and they can be held accountable for both their actions and inactions.

Duty of care is a core Canadian governance principle. The CBCA requires that every director and officer of a corporation “exercise the care, diligence and skill that a reasonably prudent individual would exercise in comparable circumstances”. It’s also an expectation in Canada that directors shall understand and fulfill their fiduciary duties. In the world of governance, fiduciary duty implies loyalty and setting aside one’s personal interests in order to safeguard and act in the best interests of the corporation.

Amendments to the CBCA were passed in April 2018 and received royal assent in May 2018. While it may be 2020 before supporting regulations are finalized and all amendments are in force, and as late as 2021 before compliance is required, Bill C-25 represents alignment with Canadian stock exchange rules and securities legislation.

Once in force, investors can expect enhanced diversity disclosure requirements regarding directors and executive officers of publicly listed CBCA corporations. Amendments will also support online (notice-and-access) provision of shareholders’ meeting materials, which has been permissible by the Canadian Securities Administrators (CSA) since 2013. The CSA has given corporations the choice of sending information circulars and other proxy-related materials on the internet rather than via email, but that has not been readily done by some CBCA corporations because of the CBCA’s technical provisions.

CBCA Amendments associated with director elections will align with Toronto Stock Exchange (TSX) requirements, mandating a separate vote for each individual (rather than slates of candidates) and with elections to be conducted annually rather than for terms of up to three years. This will drive changes to practice at the TSX Venture Exchange (TSXV), where slate voting and staggered elections have been permissible subject to shareholders’ agreement.

The CBCA will also require majority voting in uncontested director elections. Voting options will shift from either for or withhold to for or against and, to be successful, a nominee must receive a majority of votes for election. A board will be unable to appoint an unsuccessful nominee before its next shareholders’ AGM, except in specific circumstances – if such an appointment is necessary to ensure that the board has the requisite quantity of either resident Canadian directors or independent directors.

United States Stock Market Regulations

In the United States, corporate governance practices reflect regulatory enforcement and rules-based governance, as opposed to voluntary compliance. In this environment, regulators and legislators are tasked with assessing the caliber of a corporation’s governance practices. Mandatory compliance with legislation and stock exchange requirements is the expectation, with rules derived from not only the federal government, but also from securities exchanges such as the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ).

The case for the rules-based approach? The very fact that rules are prescriptive means that they are not open to interpretation or misunderstanding. This also means a rules-based approach may be more readily enforced.

In both countries, audit committees represent single exceptions to the national norms. In Canada, the law mandates the rules for compliance. In the U.S., the law requires that U.S. corporations disclose in their annual reports which audit committee member is considered an expert. If a corporation doesn’t have such an expert on its audit committee, its annual report must then explain why that’s the case. This principle-based requirement is the one exception to rules-based governance.

Stock market regulations have impacted corporations in the United States since shortly after the stock market crash of 1929. The Securities Act of 1933, aka the Truth in Securities law, was passed to “require that investors receive financial and other significant information concerning securities being offered for public sale” and to “prohibit deceit, misrepresentations, and other fraud in the sale of securities”. This was followed in 1934 by the Securities and Exchange Act.

Early in this century, Congress passed legislation to protect investors after the failures of Enron and other financial institutions. The Sarbanes-Oxley (SOX) Act of 2002 mandated significant reforms to U.S. business practices. Designed to prevent accounting fraud and restore confidence, SOX was developed to improve financial disclosure practices, as well as corporate responsibility.

All U.S. corporations must comply with SOX regulations, and the NYSE and NASDAQ aligned their respective rules and regulations. In addition to requiring that corporations retain independent auditors, SOX requirements include conflict of interest disclosures; there are also escalated reporting requirements. The legislation also articulates penalties for fraud and noncompliance.

Modern Board Requirements

Today, board independence is a critical factor for corporations listed on either the NYSE or the NASDAQ. The NYSE mandates that listed corporations shall have a majority of independent board directors. Director nominees of NASDAQ-listed corporations must be either selected or recommended for the board’s selection by either a nominating committee consisting solely of independent directors or by independent directors who constitute “a majority of the Board’s Independent Directors in a vote in which only Independent Directors participate.”

Compensation is also impacted. NYSE-listed corporations must have compensation committees, in addition to nominating and corporate governance committees composed entirely of independent directors. While NASDAQ-listed corporations are not required by the exchange to maintain formal compensation, nominating and corporate governance committees consisting entirely of independent directors, they must provide independent director oversight of executive and director compensation, as well as the director nomination process. In some instance, NASDAQ-listed companies establish boards with a majority of independent directors.

Governance and investors on both sides of the border have benefitted from passage of the Sarbanes-Oxley Act. SOX has impacted stock market regulations, provided a wakeup call for all boards and driven the evolution of best practices.

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Shelagh Donnelly
Shelagh Donnelly writes about governance and the world of administration, and speaks internationally on both topics. She's been a direct report to C-level executives, including four CEOs, in the private and public sectors. Shelagh spent the last decade of her 21-year higher education career immersed in the world of governance. As the institution's governance point person, she elevated the directors' onboarding program, championed the introduction of portal software, and introduced efficiencies and practices that enhanced operations and ongoing board development. Responsible for effective operations of the institution's governance system and accountable to board Chairs and the institution's CEOs, Shelagh supported all five of the board's committees. She worked with four board chairs, more than a dozen committee chairs and multiple directors. Shelagh's professional affiliations have included the Institute of Corporate Directors (ICD) and the National Association of Presidential Assistants in Higher Education (NAPAHE). Through the Association of Governing Boards' (AGB's) Board Professionals Leadership Group, she served as a board professional mentor. She remains a member of Governance Professionals of Canada (GPC) and has served as Chair of the Board of Directors of CICan:GPOP (GPOP), a national professional association affiliated with Colleges and Institutes Canada (CICan). She is one of only two individuals to be recognised with the CICan:GPOP Award for Distinguished Service. Shelagh began publishing Exceptional EA, an online professional development resource for career assistants, in 2013. She continues to publish Exceptional EA and write for other publications, and is the author of the forthcoming book, The Resilient Assistant. Exceptional EA: ' Colleges and Institutes Canada (CICan):