Since the legalization of recreational cannabis on October 17, 2018, the Canadian cannabis industry has experienced a significant boom. In its 2018 Cannabis Report, Deloitte predicted that legal sales of marijuana are expected to generate up to $4.34 billion in 2019. Moreover, and as previously discussed, Health Canada has introduced draft regulations governing the production and sale of edibles, extracts, and topicals, potentially providing additional growth opportunities for Cannabis companies to partner with the traditional food and beverage industry.
As the industry continues to grow, it is worth asking the question, how do these companies stack up from a governance perspective? One point of reference is the Globe and Mail’s “Board Games” rankings. These annual rankings rate the corporate boards of S&P/TSX composite index companies on a scale of 1-100, based on their corporate governance practices. The rankings are based on an analysis of four sub-categories (namely: board composition, shareholding and compensation, shareholder rights, and disclosure) and the assessment criteria are generally more rigorous than the “mandatory minimum” standards imposed by regulators. In 2018, of the 242 companies examined, three cannabis companies were ranked 226 or lower.
The rankings make sense given how young the legal cannabis industry is in Canada, as the focus for these companies at this early stage will undoubtedly be on growth over governance. However, a short-sighted approach to governance may lead to headaches down the road.
The following factors, identified by the Globe and Mail, will serve as a useful starting point for Cannabis companies seeking to develop their governance structures as they grow:
- Board composition and diversity
- increasing the number of independent directors on both the board and board committees; and
- working to increase diversity in terms of board composition, coupled with the adoption of formal board and executive diversity policies.
- Director and executive performance
- conducting self-assessments and peer-review assessments in order to evaluate director performance;
- providing director education programs to board members;
- ensuring there is a CEO succession planning process in place;
- separating the roles of chairman of the board and Chief Executive Officer;
- establishing guidelines, policies and procedures for share ownership by the board and executives; and
- providing robust disclosure on the directors of the company, providing tailed director biographies, accurately explained directors’ relationships to the company, and fully disclosed the value of all directors’ shareholdings.
- Executive compensation
- prohibiting executives from using financial instruments to hedge or offset their equity exposure; and
- disclosing how the company ensures executive pay is linked to financial performance relative to the company’s peer group.
- Shareholder rights
- adopting shareholder rights processes, such as say-on-pay votes; and
- adopting policies for clawing back bonuses when wrongdoing has occurred, or requiring CEOs to hold on to shares for a predetermined period after leaving.
Some of these factors will be easier to address than others. For example, simply enhancing disclosure of directors’ shareholdings and relationships can improve a company’s corporate governance standing with minimal additional effort or expenditure – therefore not distracting management or the board from their focus on growth. Similarly, conducting self and peer-review assessments for board members, separating the role of chairman from the role of CEO, and enhancing the disclosure around executive compensation are all relatively painless ways in which companies can demonstrate to their shareholders that they take governance issues seriously. Moreover, proactively addressing the more manageable deficiencies could buy cannabis companies time to address some of the larger action items, such as adopting shareholder rights processes, down the road.
By strengthening their corporate governance practices, organizations involved in the legal recreational marijuana industry can send a strong signal to their shareholders, to Canadian securities regulators and exchanges, as well as to the more sophisticated investors they will undoubtedly seek to attract that cannabis is a strong and professional budding Canadian industry.
Stay informed on M&A developments and subscribe to our blog today.