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Governance Insights 2020 Lessons and Guidance for a New Decade the Information in This Publication Should Not Be Relied Upon As Legal Advice

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Governance Insights 2020 Lessons and Guidance for a New Decade the Information in This Publication Should Not Be Relied Upon As Legal Advice 10TH EDITION Governance Insights 2020 Lessons and Guidance for a New Decade The information in this publication should not be relied upon as legal advice. We encourage you to contact us directly with any specific questions. © 2020 Davies Ward Phillips & Vineberg LLP. All rights reserved. 10TH EDITION Governance Insights 2020 Lessons and Guidance for a New Decade Davies Governance Insights 2020 is a comprehensive report analyzing the trends that have shaped the corporate governance landscape and those that are expected to define the next decade. Based on extensive research data, the report provides an essential overview of the diverse issues facing Canadian public companies today and practical guidance to help boards stay ahead of these challenges and position their organizations for long-term success. For more information on any of the issues raised in this report or to explore how we can bring value to your board and governance teams, contact one of our experts listed under Key Contacts at the end of the report. i Contents Executive Summary Chapter 03 01 Navigating Financial Distress: Key Considerations for Directors Chapter 01 33 Special Committees: Governance Safeguards for Conflict of Interest Chapter 04 Transactions and Shareholder Activism High-Stakes Situations Abates, but Not for Long: 05 Significant Activity and Developments in 2020 49 Chapter 02 Risky Business: The Board’s Role in Enterprise Chapter 05 Risk Management Let’s Take This Online: 21 Virtual Shareholders’ Meetings in 2020 and Beyond 67 Chapter 06 Executive Decisions: Compensation Trends In and Outside of Times of Crisis 83 ii Chapter 07 Database and Beyond Gender: Methodology Diversity and 139 Inclusiveness Now and Going Forward Notes 97 140 Chapter 08 Contributors ESG and Climate Change in the Shadow of 150 COVID-19: “E,” “S” & G Are Here to Stay Key Contacts 111 151 Chapter 09 Governance in a Nascent Industry: Lessons from Canada’s “Green Rush” 125 iii Executive Summary It is fitting that the 10th anniversary edition of our Davies Governance Insights report coincides with the start of a new decade, a milestone that typically invites reflection on where we’ve been and what the coming years may hold. Before the end of last year, however, no one could have predicted that a “black swan” event in the form of a virus would bring the world to its knees in a matter of weeks. By March 2020, COVID-19 was declared a global pandemic, shuttering economies, shaking stock exchanges and upending businesses in nearly every industry and geographic corner of the world. In corporate boardrooms, directors found themselves scrambling to respond to a crisis for which there is no playbook. COVID-19 added an extra layer of challenges for directors to consider, from operational and supply chain disruptions to sharp declines in demand and revenue, to employee concerns and liquidity constraints. Layered on these demands were a heightened degree of scrutiny on leadership and risk management and the need to carefully balance short-term priorities with long-term goals. 1 Davies | dwpv.com Despite the unprecedented nature and scope of primacy model toward a broader stakeholder-driven COVID-19, the crisis should not be viewed as an isolated model of corporate governance that calls on issuers to event. For decades, systemic shocks have been on consider the interests of a wider range of stakeholders, the rise, whether in the form of global financial crises, including employees, customers, suppliers, communities digital revolutions, political uprisings, natural disasters and the environment. The practical result is that or pandemics. At the same time, in the 10 years that today’s directors must proactively manage the evolving we have been publishing Davies Governance Insights, and often competing needs of a diverse group of massive shifts in the technological, environmental, socio- constituencies in increasingly complex situations. economic and geopolitical environments have reshaped the expectations and operating context of businesses. If there’s one silver lining in this challenging time, it’s Over the past decade, we have also witnessed a that upheaval can lead to new understanding and meteoric rise in the concentrated accumulation of opportunities. This multidimensional crisis has exposed wealth by asset managers (including Vanguard Group, cracks in business policies and practices that might BlackRock, Inc. and State Street Global Advisors) not otherwise have come to light, thereby opening and giant institutional investors (including a number the door for much-needed change. When the dust of Canadian pension plan funds), which are wielding settles, boards and management teams will have the increased influence over a wide range of environmental, opportunity to tap into the learnings from their COVID-19 social and governance (ESG) matters. During this period, responses in order to reset strategies and build more climate change has risen to the forefront of corporate resilient governance structures that can prevail through governance trends, culminating in the January 2020 future shocks. This will necessitate looking beyond letter from BlackRock CEO Larry Fink announcing the business space to set in place good governance initiatives to “put sustainability at the center of practices that will sustain the business for the longer [BlackRock’s] investment approach.” And more recently, term. Only by considering and implementing these widespread recognition of institutionalized racism and practices and strategies will companies be sufficiently calls for change in the wake of George Floyd’s death prepared to respond and recover when – not if – the next have brought the discussion of racial diversity to the disruption occurs. boardroom. In this context, change and disruption should be viewed as the expectation, not the exception. With these overarching themes in mind, the issues discussed in this report can be grouped into three Moreover, when combined with the enormous human distinct, yet interwoven, principles that should guide an and economic toll caused by COVID-19, these changes issuer’s approach to governance over the next decade. have brought new significance to the role of the “S” in ESG matters, and have highlighted the importance of fully integrating ESG factors into a company’s governance, strategy and operations. The crisis has also accelerated the push to move beyond a shareholder- Governance Insights 2020 2 Executive Summary (Cont'd) 1. RESPOND QUICKLY TO IMMEDIATE – The economic disruption caused by COVID-19 has CHALLENGES resulted in many otherwise healthy companies facing financial distress and possible insolvency. We provide When the unexpected strikes, boards must act swiftly an overview of the duties, obligations and potential and decisively to address urgent concerns, without liabilities of directors of distressed companies and the losing sight of long-term objectives. The following tools available to preserve their value in chapters discuss the key issues for consideration and Chapter 3, Navigating Financial Distress: Key the legal and regulatory frameworks that govern their Considerations for Directors. application. – In high-stake situations, special committees can be 2. ADOPT A PROACTIVE APPROACH TO valuable tools in helping boards fulfill their legal duties GOVERNANCE and mitigate risks associated with conflicts of interest in corporate decisions. We outline tips on when boards Staying ahead of trends and taking a strategic approach should consider striking special committees and to an issuer’s governance, instead of merely reacting provide practical insights on how to developments and compliance requirements, can to effectively carry out their mandates in make the difference between a company leading or Chapter 1, Special Committees: Governance lagging in an industry in the decade ahead. The following Safeguards for Conflict of Interest Transactions chapters explore issues that we expect to remain in the and High-Stakes Situations. spotlight and be subjected to heightened scrutiny in the coming years. – Crisis situations such as COVID-19 test a company’s enterprise risk management (ERM) frameworks – Shareholder activism has become a fixture in Canadian and practices. We review boards’ responsibility for and global capital markets. While COVID-19 caused a overseeing ERM and discuss practical measures that temporary decline in activist demands, we expect the boards can use to strengthen their risk-management slowdown to be fleeting. We outline the year’s most oversight functions and weather a crisis in notable trends and provide practical guidance for both Chapter 2, Risky Business: The Board’s Role in issuers and shareholders in Chapter 4, Shareholder Enterprise Risk Management. Activism Abates, but Not for Long: Significant Activity and Developments in 2020. 3 Davies | dwpv.com When the dust settles, boards and management teams will have the opportunity to tap into the learnings from their COVID-19 responses in order to reset strategies and build more resilient governance structures that can prevail through future shocks. – Virtual shareholders’ meetings, which were almost – Significant events in 2020 have expanded the non-existent in Canada prior to 2019, have become the diversity discussion beyond gender to include race new normal in the COVID-19 era. We examine how the and ethnicity. We discuss the evolving expectations pandemic has changed the landscape of shareholders’ being placed on Canadian organizations and provide meetings and discuss key considerations
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