For many issuers operating in emerging industries, as has generally been the case in the cannabis space, management’s focus is often on rapid growth, establishing market position and executing its strategic vision. These issuers are often founder-led and may have executive teams and boards of directors that lack public company experience. Good corporate governance practices are not always top of mind during this growth phase. However, it is critical for junior issuers to cultivate independent boards with a diverse array of relevant industry and public company experience, particularly when the executive team has limited experience leading a public issuer. Management may be tempted to preserve a board of directors composed of familiar candidates who support the founder’s vision; however, recent developments in the cannabis industry illustrate the heightened potential for regulatory and investor scrutiny of board composition and effectiveness of early-stage companies, as discussed below. CSA REMINDS CANNABIS ISSUERS OF CORPORATE GOVERNANCE EXPECTATIONS On November 12, 2019, just over one year after recreational legalization, the securities regulatory authorities of Ontario, British Columbia, Québec, New Brunswick, Saskatchewan, Manitoba and Nova Scotia (CSA Staff) issued CSA Multilateral Staff Notice 51- 359 – Corporate Governance Related Disclosure Expectations for Reporting Issuers in the Cannabis Industry (CSA Notice 51-359). 200 CSA Notice 51-359 specifically targeted issuers in the cannabis sector and in other emerging growth industries, and highlighted two principal concerns regarding the independence of board members of cannabis issuers: 1 Many issuers identified board members as being independent without giving adequate consideration to potential conflicts of interest or other factors that may compromise their independence.
2 CSA Staff observed instances in which the chair of the board and the chief executive officer (CEO) of the cannabis issuer were the same individual. As discussed in detail in last year’s Davies Governance Insights 2019 , 201 the need for independent directors on public company boards is a well-established principle. Securities regulators and stock exchanges have specific regulations, and proxy advisory firms offer additional guidelines that influence their voting recommendations. Director independence is considered critical to aligning directors’ interests with those of the issuer’s shareholders and to maximizing directors’ objectivity – and thus effectiveness – in their decision-making. It is generally recommended that boards comprise a majority of independent directors, subject to certain exceptions. Although the TSX, Canadian securities regulators and proxy advisory firms’ definitions of independence vary, they are all concerned with relationships that could reasonably be expected to interfere with a director’s ability to act objectively and without bias in fulfilling his or her fiduciary duty to act in the best interests of the corporation. CSA Notice 51-359 specifically noted that independent directors must not have a direct or indirect “material relationship” with the issuer. This refers to any relationship that could be reasonably expected to Director independence is considered critical to aligning directors’ interests with those of the issuer’s shareholders and to maximizing directors’ objectivity – and thus effectiveness – in their decision-making.
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Governance Insights 2020
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