Overview

On October 26, 2017, the Canadian Securities Administrators (CSA) published for comment Consultation Paper 52-404 "Approach to Director and Audit Committee Member Independence", which is intended to facilitate a broad discussion on the appropriateness of the CSA’s approach to determining director and audit committee member independence.

The Consultation Paper outlines key historical developments related to the CSA’s corporate governance regime, sets out the CSA’s approach to determining director and audit committee member independence, and describes the approaches to determining independence in other jurisdictions. The Consultation Paper also examines the benefits and limitations of the CSA’s approach.

The CSA’s current approach to determining whether a director or audit committee member is independent was introduced in 2004. This approach is largely subjective, but contains prescriptive elements (bright-line tests) that, when applicable, do not permit the board to determine whether a director could reasonably be expected to exercise independent judgement. It is predominantly derived from the concepts of independence adopted by the New York Stock Exchange (NYSE) and the Nasdaq Stock Market (Nasdaq) following several U.S. financial reporting scandals, as modified by the requirements set out in the Sarbanes-Oxley Act of 2002.

On July 26, 2018, the CSA published CSA Staff Notice 52-330 Update on CSA Consultation Paper 52-404 Approach to Director and Audit Committee Member Independence. The notice summarizes feedback received during the CSA’s consultation on the approach to determining director and audit committee member independence, and outlines the CSA’s rationale for maintaining unchanged the current approach. 

The Consultation Paper comment period ended on January 25, 2018. The CSA received 27 comment letters from various stakeholders, including: investors; investor advocacy groups; issuers; national organisations representing corporate directors and other professionals; law firms; and other stakeholders

Considering the realities of the Canadian market and the comments received, the CSA have concluded that it is appropriate to maintain unchanged the current approach to determining director and audit committee member independence.  It recognizes that the current approach has benefits and limitations. Upon review, it is satisfied that it strikes an appropriate balance between affording sufficient discretion to the board of directors to determine whether an individual could reasonably be expected to exercise independent judgement, and providing prescriptive elements that preclude an individual from being considered independent in certain circumstances.

The CSA concluded that the current approach has been in place since 2004 and noted that stakeholders understand and have adapted accordingly. Making changes to the current approach or replacing it with an alternative approach could result in additional costs for issuers and efforts for investors to adapt to such changes. As a result, the CSA is of the view that, in this case, any potential benefits of a change to the approach are outweighed by the potential negative impact of implementing such a change.

Recent activities

July 2018

On July 26, 2018, the Cana­dian Se­cu­ri­ties Ad­min­is­tra­tors (CSA) published CSA Staff Notice 52-330 Update on CSA Consultation Paper 52-404 Approach to Director and Audit Committee Member Independence. The notice summarizes feedback received during the CSA’s consultation on the approach to determining director and audit committee member independence, and outlines the CSA’s rationale for maintaining unchanged the current approach. 

October 2017

On October 26, 2017, the Canadian Securities Administrators (CSA) published for comment CSA Consultation Paper 52-404 "Approach to Director and Audit Committee Member Independence". Comments are requested by January 25, 2018.