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HIGHLIGHTS

• single initiative of all CSA members on governance
• guidelines not mandatory
• disclosure requirements mandatory
• TSX to adopt the same disclosure requirements
• guidance provided for income trusts on application of guidelines
• definition of independence refined

INTRODUCTION

On April 15, 2005, the Canadian Securities Administrators (CSA) published in final form National Policy 58-201 Corporate Governance Guidelines (the "Policy") and National Instrument 58-101 Disclosure of Corporate Governance Practices (the "Disclosure Instrument") together with Form 58-101F1 and Form 58-101F2. The Policy and the Disclosure Instrument are initiatives of all members of the CSA. Assuming the necessary ministerial approvals are obtained, the Policy and Disclosure Instrument will come into force on June 30, 2005. The Disclosure Instrument will only apply to annual information forms or information circulars which are filed following financial years ending on or after June 30, 2005.

The CSA have also finalized Amendments to Multilateral Instrument 52-110 Audit Committees which amend the definition of independence to reflect more closely the definitions used in the United States for directors and audit committee members and make certain technical amendments. The amendments will also come into force on June 30, 2005.

The Policy provides guidance on governance practices for all issuers other than investment funds. The Disclosure Instrument requires non-exempt issuers to make prescribed disclosure regarding their governance practices with the aim of increasing the transparency of governance practices of issuers in the market. Where an issuer does not follow a particular guideline, it generally must disclose what the board of directors does to facilitate the objective of the proposed guideline.

The guidelines contained in the Policy include many of the TSX corporate governance guidelines first introduced in 1995. The TSX will replace its governance guidelines with a requirement that TSX-listed issuers which are subject to the Disclosure Instrument make disclosure in accordance with that instrument.

THE GOVERNANCE GUIDELINES

The Policy attempts to achieve a balance between investor protection and fair and efficient markets. It also attempts to recognize the greater number of smaller and controlled issuers in the Canadian market. In addition, it states the intention of the CSA to further study the governance of controlled issuers and consider changes to the Policy and the Disclosure Instrument once such study is completed. The Policy is not prescriptive but is intended to provide guidance to issuers. It encourages issuers to consider the suggested standards in developing their own practices. The Policy therefore adopts a more traditional Canadian approach of providing guidance regarding governance rather than imposing mandatory rules as is the practice in the United States. The CSA recognize that governance practices are constantly evolving and have previously indicated that they intend to review the guidelines periodically.

The guidelines contained in the Policy relate to board independence, the roles of the board and management, directors' education, board assessment, selection of directors and the compensation of senior officers. The Policy includes the following key recommendations:

Independence of the Board

• a majority of the directors should be "independent".
• the independent directors should hold separate, regularly scheduled meetings.
• the chair should be independent and, if not, an independent lead director should be appointed and act as the effective leader of the board.

The Policy and the Disclosure Instrument adopt a definition of independence contained in the Audit Committee Instrument. The general test is that a director will be independent if he or she has no direct or indirect material relationship with the issuer. A material relationship exists where the directors are of the view that the relationship could reasonably be expected to interfere with the exercise of the member's independent judgment. Certain relationships that are deemed to preclude independence are then described. The relationships that will preclude independence for directors are discussed below under "Definition of Independence."

For issuers who are reporting issuers only in British Columbia, the definition of independence is not applicable; instead independence is based upon whether a reasonable person with knowledge of all the relevant circumstances would conclude that the director is independent of management and of any significant security holder.

Defining the Role of the Board and Management

• adoption of a written mandate under which the board assumes responsibility for the stewardship of the issuer, including responsibility for: (i) satisfying itself, to the extent feasible, as to the integrity of the executive officers and as to their creation of a culture of integrity; (ii) adopting a strategic planning process; (iii) identifying risks and ensuring implementation of systems to manage such risks; (iv) succession planning; (v) adopting a communication policy; (vi) internal control and management information systems; and (vii) developing an approach to corporate governance. A separate corporate governance committee consisting of non-management directors, a majority of whom are independent directors, may be established to fulfill (vii).
• the mandate should set out methods for receiving feedback from stakeholders (which it is suggested could include establishing a process for direct communication between stakeholders and independent directors).
• adoption of position descriptions for the chair, committee chairs and CEO. There is no suggestion that there be a formal description of the general role of director; however, it is recommended that the written mandate of the board outline the responsibilities of directors and what is expected of them.

Education and Orientation

• comprehensive orientation for new directors and continuing education for all directors.

Board Assessment and Selection of Directors

• nominating committee composed entirely of independent directors.
• written charter of the nominating committee setting out its purpose, responsibilities, membership, structure, operations and manner of reporting to the board. The committee should also be given authority to engage and compensate outside advisors.
• in considering potential nominees, the committee should consider the competencies and skills required of the whole board, assess the competencies and skills of each existing director and proposed nominee and consider whether each nominee can devote sufficient time and resources to his or her duties.
• the board should regularly assess the effectiveness of the board as a whole, its committees and each individual director. The assessment should consider the board and committee mandates or charters and, in the case of an individual director, the applicable position description(s), as well as the competencies and skills each director is expected to bring to the board.

Compensation of Senior Officers

• compensation committee composed entirely of independent directors.
• written charter of the compensation committee setting out its purpose, responsibilities, membership, structure, operations and manner of reporting to the board. The committee should also be given authority to engage and compensate outside advisors.
• responsibility for reviewing and approving corporate goals and objectives of the CEO, evaluating the CEO in light of those goals and objectives, and determining compensation or making compensation recommendations to the board.
• responsibility for recommendations on non-CEO officer and director compensation, incentive and equity-based plans.
• reviewing executive compensation disclosure prior to release.

Code of Conduct and Ethics

• adoption of a written code of business conduct and ethics setting out standards designed to promote integrity and deter wrongdoing and addressing issues described in the Policy.
• board responsibility for monitoring compliance with such code, and any waiver of the requirements of such code for the benefit of a director or executive officer to be granted only by board or committee.

THE DISCLOSURE INSTRUMENT

The Disclosure Instrument requires issuers to disclose their corporate governance practices in their management information circular (or Annual Information Form (AIF) if no circular is prepared). Where a guideline set out in the Policy is not the governance practice of an issuer, disclosure generally requires a description of how the board ensures that the objective of the guideline has been met. The Disclosure Instrument also requires disclosure of:

• the independence of each director. The basis for the determination that a director is not independent must be set out;
• the directorships of other issuers held by directors;
• the number of separately held meetings of the independent directors;
• directors' record of attendance at board meetings; and
• details of the identity of any compensation consultant that has been retained, together with particulars of the consultant's mandate and any other work the consultant performs for the issuer.

An issuer which has a business code of conduct and ethics must also file the code and all amendments on SEDAR. The CSA have indicated in the Policy that conduct of a director or executive officer which represents a material departure from a business code will likely be considered to be a material change triggering the material change reporting requirements of securities laws.

Unlisted issuers or issuers which are not listed on a designated exchange (venture issuers), which include TSX Venture Exchange issuers, will be required to disclose their governance practices in a more general fashion.

The Policy and Disclosure Instrument state that, in the case of an income trust, it should be recognized that the functions of a corporate issuer, its board or management may be performed by any or all of the trustees, board or management of a subsidiary of the trust, or the board, management or employees of a management company. Income trust issuers are instructed to apply the guidelines and disclose their governance practices in a manner that recognizes that the functions may be performed by all or any of such persons.

APPLICATION OF THE POLICY AND INSTRUMENT

The Policy applies to all reporting issuers other than investment funds. The Disclosure Instrument applies to all reporting issuers other than investment funds, SEC foreign issuers, designated foreign issuers, certain exchangeable security and credit support issuers and issuers of asset-backed securities. An exemption is provided for subsidiaries which have no listed equity securities other than non-convertible, non-participating preferred securities, provided the parent company is subject to the Disclosure Instrument or comparable US rules.

DEFINITION OF INDEPENDENCE

The Audit Committee Instrument which was introduced in March 2004 requires issuers, other than venture issuers, to have an audit committee consisting of at least three members, all of whom are independent from the issuer. Independence for the purposes of the Policy, the Disclosure Instrument and the Audit Committee Instrument is based upon whether or not the nominee has a direct or indirect material relationship with the issuer. Certain relationships will preclude independence. The amendments to the definition of independence clarify uncertainties identified in the Audit Committee Instrument and facilitate cross-referencing to the Policy and Disclosure Instrument.

The amendments adopt two sets of relationships that will preclude independence. The first set of defined relationships (based upon New York Stock Exchange Corporate Governance Rules) precludes directors or nominees from being considered independent for purposes of the Policy, the Disclosure Instrument and the Audit Committee Instrument. The second set of relationships (based upon the requirements of the SEC), prevents certain directors from being considered independent under the Audit Committee Instrument for purposes of serving on an audit committee.

A director or proposed nominee to a board will be considered to have a material relationship with an issuer which precludes his or her independence for all purposes:

1. if he, she or an immediate family member is, or has been within the last three years, an employee or executive officer of the issuer (in the case of immediate family members independence will only be affected if the immediate family member is or was an executive officer);
2. if he or she is a partner or employee of the issuer's internal or external auditor or was within the last three years a partner or employee and personally worked on the issuer's audit during that time;
3. if his or her spouse, minor child or stepchild, or child or stepchild who shares a home with him or her, is a partner or employee of the issuer's internal or external auditor and, if an employee, participates in its audit, assurance or tax compliance practice, or was within the last three years a partner or employee of the internal or external auditor and personally worked on the issuer's audit during that time;
4. if he, she or an immediate family member is, or has been within the last three years, an executive officer of an entity on whose compensation committee any executive of the issuer serves or served; or
5. if he or she or an immediate family member who is employed as an executive officer received more than $75,000 in direct compensation from the issuer (other than for service as a director, former interim CEO or part-time chair or vice-chair and not including fixed amounts received under a retirement or deferred compensation plan that are not contingent on continued service) during any twelve-month period within the last three years.

The amendments provide that the term "issuer" includes both parent and subsidiary entities of the issuer. In determining if a director is independent, it is not necessary to consider relationships that ended prior to March 30, 2004 or, in the case of relationships with the parent or subsidiary of an issuer, relationships that ended prior to June 30, 2005.

In addition, for the purposes of serving on an audit committee, a director will not be considered independent:

1. if he or she (or his or her spouse, minor child or stepchild, or child or stepchild who shares a home with him or her) accepts, directly or indirectly, any consulting, advisory or other compensatory fee from the issuer or any subsidiary (other than compensation for acting as a director or retirement compensation); or
2. if he or she is an affiliated entity of the issuer or any subsidiary.

Although the relationships which preclude independence also include relationships with a parent or subsidiary of the issuer, the amendments provide that the "controlled company exemption" contained in the Audit Committee Instrument could be available to a member of the audit committee of the issuer who would be independent but for a relationship (such as employment) with a parent or subsidiary of the issuer. As a result, an employee of a parent company could rely on the controlled company exemption and be considered independent for the purposes of serving on the issuer's audit committee, provided the other conditions of the exemption are met.

There are also several other clarifying amendments to the Audit Committee Instrument. These include specifically precluding a full-time non-executive chairman, but not a part-time chair, vice-chair or interim CEO, from being a member of the audit committee. Venture issuers, like other issuers to which the instrument applies, are also required to disclose the education and experience of their audit committee members.

CONCLUSION

The unified approach taken by the CSA in producing the Policy and Disclosure Instrument and the proposed adoption by the TSX of the disclosure requirements contained in the Disclosure Instrument are welcome changes in Canadian corporate governance. It remains to be seen whether the Canada Business Corporations Act will be amended as proposed in May 2004 to introduce corporate governance requirements, thereby providing an additional layer of regulation for Canadian issuers subject to that legislation.

The purpose of this document is to provide information as to developments in the law.  It does not contain a full analysis of the law nor does it constitute an opinion of Ogilvy Renault or any member of the Firm on the points of law discussed.

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