In recent months, Barrick Gold Corp. has been moving quickly to redefine itself and the highly competitive gold industry. But as it acts on its global ambitions, Barrick is not only making waves in the gold sector, it is also provoking important debate about the ramifications of Canadian companies becoming international champions.
Rarely has Barrick been as busy as in the last six months, with a US$6-billion acquisition of Randgold Resources Ltd.; the contemporaneous appointment of Randgold’s CEO as Barrick’s CEO; a US$17.8-billion hostile bid for US-based Newmont Mining Corp; and a subsequent agreement with Newmont to enter instead into a joint venture involving their assets in Nevada.
So when Barrick unveiled its deal with Randgold in September, it was not surprising that few people noticed mention of a plan that would allow it to dispense with the resident Canadians on its board of directors. The plan involved moving the company from Ontario’s corporate jurisdiction to British Columbia’s.
Buried in the press release about the transaction was a statement about how British Columbia “has a more modern corporate statute that provides additional flexibility to Barrick in a number of areas, including increased flexibility with respect to capital management and in the composition of the Board of Barrick.”
It wasn’t long before the company announced it would no longer have any resident Canadians on its board. Word came in January 2019, and Barrick’s new CEO also made clear that he would cut positions from the company’s Toronto head office.
Barrick’s announcement provoked strong reactions. Globe and Mail columnist Eric Reguly called it another example of the hollowing out of corporate Canada. But this time we aren’t dealing with a foreign company acquiring a significant Canadian company (as with Inco, Falconbridge or Alcan). Instead, we have a Canadian incorporated company determined to turn itself into a global player unencumbered by its Canadian roots.
Barrick’s decision shows the limits of using corporate law to shape the composition of boards. It also shows how easily efforts to foster diversity within Canada’s boardrooms using corporate law might be derailed. And it forces us to ask this question: Why have director residency rules in the first place?
In Canada, each of the provinces and territories, as well as the federal government, is constitutionally entitled to enact legislation allowing a business to incorporate within its jurisdiction. The corporate law statute in that jurisdiction is what then governs the business.
A Canadian business can choose one of those 14 jurisdictions. Some have rules that mandate board composition; others do not. A Canadian company can also move from one jurisdiction to another — as Barrick did — provided the company first obtains shareholder approval. Canada has a patchwork of director residency rules that flows from having those 14 corporate law statutes, as well as from evolving views on the merits of those rules.
Out of concern about the pace at which US companies were acquiring Canadian businesses in the 1950s and 1960s, the federal government added significant director residency requirements to its corporate law in 1975, requirements that called for at least 50 percent of directors on boards of federally incorporated companies to be Canadian residents.
Ontario soon enacted similar provisions. But by the mid-’90s, Canadian companies were increasingly active outside of Canada, and some jurisdictions with director residency requirements were losing incorporation business to jurisdictions with no such requirements. For example, many mining companies headquartered in British Columbia that were active globally were incorporating in the Yukon to avoid the residency requirements that once existed in British Columbia’s corporate law.
The federal government reduced the threshold to 25 percent in 2001. Ontario followed suit in 2007. In the meantime, British Columbia got rid of the requirements in 2004 — part of a wholesale modernization of its corporate law intended to recapture incorporation business being lost to jurisdictions like the Yukon. For its part, Quebec engaged in its own comprehensive corporate law reform in 2009, seeing no need to include director residency requirements.
As a result, we now have several jurisdictions in Canada with corporate law statutes that contain no director residency requirements. Like it or not, it is only a matter of time before more companies follow Barrick’s move in order to break free of these requirements.
Ontario and the federal government will therefore have little choice but to revisit their director residency requirements. When they do, they should bear in mind that much has changed since 1975.
Canada’s economy has evolved meaningfully. For many years now, we have seen significantly more Canadian companies buying foreign companies than foreign companies buying Canadian companies.
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When the initial 50 percent requirement was enacted, Canada had only just set up an agency to oversee the terms on which foreign companies could acquire Canadian companies. Today, this body forms part of a government department that now has significant experience regulating foreign acquisitions.
Under the Investment Canada Act, the federal government regularly insists on undertakings from foreign buyers concerning board composition, head office location and employment. This approach has the virtue of targeting foreign entities buying Canadian companies without constraining Canadian businesses that are expanding overseas and that want the flexibility to have a board made up largely, or even entirely, of non-Canadians.
Recently, we have also seen the federal government push to have its corporate law lead the way on new initiatives designed to foster diversity within Canada’s boardrooms. In 2018, it enacted laudable reforms that will require federally incorporated public companies to disclose the progress they are making in enhancing diversity on their boards, by adding more women, members of visible minorities, Indigenous persons and people with disabilities.
But these requirements, when combined with director residency requirements, might lead some businesses to decide to move to a more flexible jurisdiction. For this reason, the federal government would be wise to dispense with residency requirements in its corporate law.
There are, of course, strategic industries that are federally regulated and that need Canadian voices to be heard in the boardroom. But this can be addressed through statutes that restrict foreign ownership and control. For example, the telecommunications, media and airline sectors in Canada are all subject to such legislation. Some of it already looks at the number of Canadians sitting on a company’s board of directors when assessing whether a business is Canadian controlled.
As for other sectors, be they federally or provincially regulated, the federal government can rely on its powers under the Investment Canada Act to deal with the biggest reason to fear the loss of the perspectives that Canadian directors bring to the table: namely, foreign takeovers of Canadian businesses.
But for Canadian companies that decide they need more non-Canadians on their boards, the federal government should get out of the business of imposing “one size fits all industries” residency requirements. Doing away with this aspect of federal corporate law would make it less likely that the federal government’s diversity initiatives will backfire and lead companies to move out of the federal regime under the pretense that they are doing so because of director residency requirements.
Some companies might still avoid the federal statute in the first place so as to stay away from the new diversity disclosure requirements. But in the absence of director residency requirements, it would certainly be harder for public companies that are already federally incorporated to go to their shareholders with a straight face to seek their approval to continue to another jurisdiction.
Director residency requirements are no longer appropriate for most companies incorporated in Canada. Moreover, they risk undermining efforts to use corporate law to push for more diversity in the boardroom.
To be sure, the federal government’s leadership on diversity will not provide a complete answer. We need other jurisdictions to embrace these initiatives, ones that build on disclosure requirements that provincial securities commissions have put in place to foster gender balance in the boardroom.
Time will tell whether corporate law, securities law and/or other regulatory avenues are the best way to foster board diversity. In the meantime, we need our rules governing director residency to catch up with the success and self-confidence that Canadian businesses are displaying on the global stage.
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