Increased Transparency on Diversity is Good for Investors: Morningstar to OSC

Morningstar supports increased transparency when it comes to diversity beyond gender at the board levels of an issuer, as it addresses a major information gap investors face in assessing board diversity. We outlined our reasons for doing so in a recent comment letter to the Ontario Securities Commission (OSC).

Earlier this year, the OSC requested comments on proposed amendments to corporate governance disclosures around board nominations, board renewal and diversity, and on proposed changes to National Policy 58-201. This request is similar to a 2021 proposal put forth by NASDAQ regarding diversity disclosures at the board level.

The meat-and-potatoes of the OSC’s request is regarding two versions of Form 58-101F1 (Form A and Form B.) While both are generally aligned with respect to disclosure requirements related to board nominations and board renewal, they each reflect different approaches respecting diversity-related disclosure issuers must provide.

More Disclosures Equal More Information for Investors

Both are designed to increase transparency about diversity, including diversity beyond women, on boards and in executive officer positions, and provide investors with decision-useful information that enables them to better understand how diversity is addressed by an issuer.

Form A would require an issuer to disclose its approach to diversity in respect of the board and executive officers but would not mandate disclosure in respect of any specific groups, other than women. Form B contemplates mandatory reporting on the representation of five designated groups on boards and in executive officer positions:

1. Women,
2. Indigenous peoples,
3. Racialized persons,
4. Persons with disabilities, and
5. LGBTQ2SI+ persons
   
   

From the investor perspective, Morningstar believes that Form B clearly offers comparability between issuers. A standardized approach results in a shorter time to collect information and derive analytics for what investors ultimately utilize to make investment decisions.

“Morningstar has a competitive advantage in collecting non-standardized data and then applying our frameworks to normalize it and create utility for investors. However, this competitive advantage is superseded by our mission to empower investors, for which we believe that a regulator-mandated standardized data set is immediately more useful,” Morningstar’s Director of Investment Research Ian Tam says.  

The immediate utility of this new set of data speaks directly to the trend in personalized investing. As investors increasingly demand to invest in line with personal values and beliefs, this type of data would add transparency for interested investors. “Moreover, it allows investment fund managers to systematically integrate this information into their investment processes. In concept this would increase capital flow to companies with diverse boards, assuming Morningstar’s view that a diverse board enhances corporate governance and reduces risk,” he adds.

Having said that, Morningstar’s concerns around form B center around nuances in regard to multi-national Canadian issuers who have board members and executives in other geographical areas (particularly those not in North America), where the prescribed groups in form B to not carry the same meaning. “Moreover, cultural sensitivities in other markets, or even within various cultural groups within Canada may prevent the degree of disclosures proposed in form B,” Tam says.

Why This Information Matters

The diversity approach and objectives of issuers are useful inputs for investors. Morningstar Sustainalytics’ research methodology currently uses this information to assess the degree of material risk inherent in an investment. Our ratings reflect our view that effective corporate governance policies around board nomination and a well-planned strategy to elect a diverse board reduce the amount of material financial risk inherent in the company.

“Policies around executive compensation, a common shareholder proposal item on proxy voting ballots and an input to our ratings methodology, is directly linked to DEI policies, further exemplifying the demand for more transparency of this type of information to investors,” Tam says.

The Information is Available, but Hard to Find

The OSC’s proposed amendments would require the disclosure of the skills, knowledge, experience, competencies and attributes of candidates that are considered and evaluated, and the regulator wanted to know if this would raise concerns for issuers regarding disclosure of confidential or competitively sensitive information.

Tam points out that as an issuer of publicly traded equity, disclosing details about board candidates would not raise confidentiality concerns.

“The backgrounds and competencies of board nominees are generally made available in the proxy voting process. Though not broadcasted publicly, interested investors can find this information today in historical proxy records, so repeating similar information in an annual filing would not change any privacy concerns,” he writes.