It’s debatable: unresolved corporate governance issues impacting 2025

Views are divided on the right approach to address many important corporate governance concerns. Among these is whether virtual shareholder meetings for public companies are beneficial for or detrimental to shareholder democracy. Additionally, debate has continued regarding whether long-tenured public company auditors should be replaced, and whether diversity, equity and inclusion (DEI) initiatives are showing progress.

Debates on these topics will shape the practices of Canadian issuers into 2025. Market participants need to have a critical understanding of these issues and adjust their practices accordingly. Participants also will have to be prepared to engage in further conversations as the marketplace continues to consider the “best” approach to these matters.

Shareholders have their say on virtual-only shareholder meetings

The COVID-19 pandemic rapidly accelerated Canadian issuers’ use of technology, including for purposes of holding shareholder meetings without the need for a physical gathering. The shift towards virtual-only shareholder meetings quickly became a trend that was supported as defining a new age of shareholder democracy. Virtual meetings have been touted for their safety, efficiency, and cost-savings benefits, as well as their climate-friendly and future-oriented approach. Now that the pandemic has subsided, many issuers are still holding their meetings in a virtual-only format. During the 2024 proxy season, 54% of the S&P/TSX 60 companies held their meeting virtually, while 15% were held in-person and 31% were hybrid meetings.

Despite the prevalence of such meetings, critics, such as the Canadian Coalition of Good Governance, have expressed concern that some issuers are using virtual-only meetings to limit shareholder voices. These critics also point to the adverse impact virtual meetings have on the ability of shareholders to exercise their rights and directly express themselves to boards of directors. One stated concern is the ability for issuers to effectively moderate questions and comments that are submitted electronically. For example, a prominent mining company this year was accused of using its virtual meeting format to substantially rephrase shareholder questions to omit potentially embarrassing content.

In the 2024 proxy season, MEDAC, a Québec-based corporate gadfly, put forward multiple shareholder proposals which sought to prohibit the holding of virtual-only shareholder meetings. A total of 12 proposals were submitted for voting by shareholders, seven of which passed. The closeness of the votes in many cases, however, demonstrates that shareholders remain ambivalent about whether a ban on virtual-only meetings goes too far.

The Canadian Securities Administrators (CSA) has maintained its pandemic-era guidance with respect to the holding of virtual-only shareholder meetings. The guidance is flexible regarding the use of these meetings, but raises disclosure and participation considerations for issuers to consider. For the 2024 proxy season, Institutional Shareholder Services (ISS) began recommending that shareholders vote against by-law amendments to permit a company to hold virtual-only meetings, and for proxy season 2025 ISS is proposing amendments to its voting guidelines which, if adopted, would result in negative voting recommendations on by-laws which give the board discretion to hold shareholders’ meetings in virtual-only format without compelling rationale. This is a concerning development, especially if ISS should decide to recommend against other by-law amendments on the basis that the existing by-law permits virtual-only shareholder meetings. Glass Lewis confirmed in its 2025 proxy voting guidelines that it does not currently have a benchmark policy voting recommendation based solely on the shareholder meeting format chosen, but it clarified that, under its current voting guidelines, in egregious cases where a board has failed to address legitimate, publicly disclosed shareholder concerns regarding the shareholder meeting format it may make an adverse voting recommendation with respect to the re-election of the chair of the governance committee chair or other accountable directors.

Starting in 2024, issuers who fail to conduct their shareholder meeting using a hybrid format will lose marks under The Globe and Mail’s Board Games scoring methodology.

Long-tenured auditors face scrutiny

The re-appointment of an incumbent auditor used to be a routine matter at a public company annual meeting. Absent major accounting issues or high levels of non-audit fees relative to audit and audit-related fees, companies could generally count on high levels of support for the re-appointment of their auditor. However, the landscape is changing. For the vast majority of companies included in the S&P/TSX 60 index, the vote on the reappointment of the auditors receives greater than 95% support, with auditors with shorter tenures receiving a higher percentage of support than those with longer tenures. For example, where tenure was disclosed, all auditors who received more than 99% support in 2024 had tenures of 15 years or less. In contrast, of the issuers who disclosed auditor tenure, auditors receiving support of 95% or less had tenures of 18 years or more.

Market participants need to have a critical understanding of corporate governance issues and adjust their practices accordingly.

In the 2024 proxy season, several issuers received shareholder proposals asking the board of directors to replace long-tenured independent auditors. Proponents of audit firm rotation argue that the independence and professional skepticism of long-tenured audit firms may be compromised as a result of the length of the relationship. They further argue that periodic rotation of the company’s audit firm is the best way to bring a fresh and unencumbered perspective to the audit of the company’s financial reporting.

Defenders of long-tenured auditors, however, point to non-nominal costs associated with the onboarding of a new auditor, and highlight that an auditor with a longer company relationship benefits from client-specific expertise and institutional knowledge developed over many years to better assess the company’s practices. Further, they point to rotation of lead audit partner as being an important factor in the assessment of auditor independence.

In 2024, the Canadian Centre for Audit Quality [PDF] re-affirmed their view that diligent monitoring and periodic evaluation of the audit firm’s performance better supports an informed decision about auditor selection, rather than relying on an arbitrary auditor term limit. This group also advised that voting against audit committees and auditors — primarily based on the tenure of the auditor — may result in unintended consequences. These include a decline in overall audit quality, and the introduction of unnecessary risk for investors.

An important development in the continuing debate is proxy advisors are commenting on long-tenured auditors in making their voting recommendations with increasing frequency. However, for purposes of their voting recommendations regarding the re-appointment of the incumbent auditor, auditor tenure is only one of several factors.

Approach to DEI is increasingly being questioned

Diversity on company boards, and DEI more broadly, have become increasingly controversial in recent years. This controversy has heightened since the U.S. Supreme Court held that the admissions programs at Harvard College and the University of North Carolina, which considered race as one of many factors when determining the incoming class of students, violated the equal protection clause of the U.S. Constitution. In recent months, prominent retail brands in the U.S. have announced the termination of their existing DEI programs, and that they will no longer tie executive compensation to diversity metrics.

Canadian companies have not, as of yet, backtracked from their publicly stated positions on DEI. However, a reduced focus on DEI may underlie a slowdown in the rate at which board seats are becoming more gender diverse. According to the Osler’s Diversity Disclosure Practices report [PDF], 2024 was the lowest increase in the proportion of board seats held by women since 2016, with only a 1.3 percentage point increase, compared to an average annual increase of 2.1 percentage points for the period from 2015 through 2023.

The Osler report also found stalled progress regarding the representation of visible minorities on the boards of Canada Business Corporations Act companies, with 10.2% of board seats held by visible minorities. This was unchanged from 2023. Limited progress was also made regarding the representation of Indigenous directors. This lack of progress is surprising. In 2024, ISS began to recommend that shareholders vote against or withhold support from the chair of the nominating committee or equivalent of a S&P/TSX Composite Index company if they did not have at least one racially or ethnically diverse board member, unless the company committed to adding at least one such director before or at the next annual meeting of shareholders. Based on the Osler report data, over one third of S&P/TSX Composite companies had not yet appointed a racially or ethnically diverse director by the date of their most recent management information circular.  

In 2023, the CSA proposed a number of broader diversity disclosure requirements. We discussed these changes in our Osler Update of May 25, 2023. Progress has been slow, with CSA members unable to publicly agree on an approach. It remains to be seen whether any CSA members will go it alone in the absence of broader national consensus.

It appears that, without continuous pressure, whether from shareholders or regulators, continued diversity progress will largely depend on companies recognizing the strategic value of implementing and enhancing DEI practices to build a pipeline of capable diverse senior leaders.

The implications for public companies

The continuing absence of any resolution of the ongoing debates regarding virtual shareholder meetings, long-tenured public company auditors, and DEI means that these issues will continue to percolate throughout the 2025 proxy season, and potentially beyond. There are approaches that issuers can implement to prepare for next year.

For those issuers seeking to continue or leave open the possibility of virtual shareholder meetings, they are advised to adopt best practices for holding virtual shareholder meetings. The Report of the 2020 Multi-Stakeholder Working Group on Practices for Virtual Shareholder Meetings [PDF] outlines a number of such practices These include being transparent about the processes that will be followed at the meeting to address shareholder questions, and seeking to present shareholder questions in the manner received, subject to legal and time constraints.

Issuers whose auditor tenure may give rise to potential questions should ensure they have a policy regarding auditor review. This should include a requirement to conduct a five-year comprehensive review of their auditor’s performance. Issuers also should set time on the board agenda for the board to discuss whether it is in the corporation’s best interests to rotate audit firms. This conversation should take into consideration the results of the most recent comprehensive review, recommendations from the Canadian Centre for Audit Quality, and voting results from shareholders. Issuers also should consider including disclosure on these practices in their management information circular.

Further, issuers should review their DEI policies and practices with a view to ensuring they comply with applicable human rights legislation. Policies should be reviewed to ensure they are designed to remove obstacles for underrepresented groups without inadvertently creating obstacles for other groups. Companies should also make sure their internal and external corporate communications are consistent with fostering an inclusive environment and supporting diverse human perspectives.