Canadian cannabis companies have been cultivating not only plants, but also expertise, as they strive to meet market demand and to generate profits. They’ve recruited botany and chemistry PhDs, along with other talent, in order to ensure both the integrity of their products and their compliance with government regulations.
Long-term success is also dependent on solid governance practices. Corporate secretaries and other governance professionals recognize that this requires an investment of time, leadership and financial resources. There’s understandable competition for such resources during a company’s early days, when management’s priorities include production, sales, compliance and more.
Investors logically select companies in no small part on the basis of financial returns. They may be more than content to see early prioritization of a company’s resource allocation toward such ends. As a company matures, though, ongoing investments in governance best practices will also increase the organization’s attractiveness to institutional investors that vet their choices in part on the basis of governance practices.
Corporate Governance for Cannabis Companies
Given the multiple challenges that young companies must navigate as they establish their footholds, it’s perhaps unsurprising that some publicly traded cannabis firms are under scrutiny for their governance practices. Best practices not only support and complement financial performance, they help to mitigate risk. Disclosure practices associated with good governance also support individual and institutional investors’ confidence when selecting stocks for their respective portfolios.
By establishing and following best practices, a board can monitor and oversee the company’s environmental, social and governance (ESG) performance. Successful execution of environmental and social initiatives can impact an organization’s financial performance and its capacity to appeal to all that talent it must recruit and retain.
Let’s consider some governance criteria established by the Globe and Mail’s Report on Business for its annual Board Games. Board Games’ 2018 report marked Report on Business’s 17th annual assessment of the boards of directors within the S&P/TSX (Toronto Stock Exchange), Canada’s equivalent to the S&P 500 market index in the United States. The 2018 assessment of governance practices at 237 companies and trusts reflects high standards, with criteria that exceed mandatory regulatory requirements. Assessments reflected reviews of information accessible through the subject organizations’ most current annual shareholder proxy circulars.
Governance continues to evolve, and so the 2018 criteria and weightings incorporated some revisions from previous Board Games evaluations. Questions reflected four aspects of governance: board composition, shareholding and compensation, shareholder rights and disclosure.
As part of the maturation process, companies could do far worse than to approach corporate governance through the lens of such standards. For governance professionals who are associated with boards already consistently performing at a high level, some of the assessment criteria may reflect routine practices. Take, for example, disclosure practices – beginning with one that many consider a basic, the disclosure of board contact information.
Board independence is another example. In this scenario, an effective board will ideally have a high ratio of independent directors. An independent director is someone who is not a current or recent employee of the company; in addition, s/he will be unrelated to management and will not be a current or recent employee of one of the company’s suppliers or professional services providers. You may determine that independent status will also require that a director not be a controlling shareholder, or an employee of a parent company. In other words, your independent director has no connection to management or the company other than through their service as a director.
Effectively Enacting Corporate Governance Through Board Committees
The same ideal of having a high ratio of independent directors is also true of effective board committees. If a board committee is to function independently within the scope of its authority and in its development of recommendations to the board, the majority of members will be independent, as opposed to being drawn from within the company itself.
When it comes to assessing board independence, another litmus test is whether or not you have two separate individuals filling the roles of company CEO and Board Chair.
In a young company striving for success, an astute board might begin by committing to routine self-evaluations – and to consistently acting upon the results. Mature boards regularly undertake evaluations of the board, board committees, individual directors and chairs. In a board’s early days, as board and governance cultures are still in development, directors may wish to take incremental steps and begin with evaluations of the board as a whole and its leadership. The board can then commit to expanding the scope of its evaluations within a defined timeline.
What might a board consider in such evaluations? Directors will want to critically examine the board’s composition. Does it meet or exceed a reasonable expectation of independence? Is recruitment supported by a competencies matrix in order to ensure the presence of the requisite expertise? Is it your directors who take responsibility for the identification and nomination of prospective directors? What level of priority is attached to diversity around the boardroom table (and within management), and what steps does the board need to take in order to ensure it attracts and engages female as well as male directors who possess the necessary expertise?
Do individual directors exercise independent thought? Do they arrive at meetings informed and prepared to respectfully debate issues and challenge assumptions as they make decisions on behalf of the company? Are directors equipped with the appropriate level of information, and in a timely manner, to support their decision-making?
As a recently legalized industry, this may be one sector in which term limits and board refreshment are not immediate issues. Instead, a board evaluation may identify ongoing board development and education among its early priorities, along with enterprise governance management (EGM). EGM is the application of technical tools and resources to address governance needs, and board portal software can equip the board to perform at a high level.
Why Cannabis Companies Should Be Using a Board Portal
Investing in a board portal provides remote access to board and committee meeting materials. With Diligent Boards™, directors and management can leverage technology that automates process chains. This can support the board’s oversight of compliance – a potentially sensitive issue in this industry. A portal can also help the company mitigate cybersecurity risks. Knowing that directors, senior management and those who support them are prime targets for cybercriminals, all involved can make a concerted shift from personal and corporate email systems to communicating and sharing attachments through Diligent Messenger.
Routine investments in board education can support board engagement and culture while also paying dividends in terms of directors’ expertise. ICD, the Institute of Corporate Directors, is a highly regarded Canadian resource for director education. It offers local chapters and events, in addition to webinars and other online resources, and an education program that recognizes graduates with the ICD.D designation. Board membership extends to your governance professionals and selected senior executives as well as your directors.
Companies are well served by specifically investing in their governance professionals’ ongoing development. They can participate alongside directors in external conferences and educational offerings on cybersecurity, board culture, strategy development, onboarding, succession planning, board evaluations, understanding insider threats and much more. Companies also benefit when their governance professionals join and participate in Governance Professionals of Canada (GPC), the professional association for those who support boards.
The ROI on those investments of time in workshops and conferences and membership in professional associations? They can make you better equipped to support the success of the board and the organization. ICD, GPC and sector-specific associations provide resources that can support your research undertakings for the board. As companies mature and directors (and sometimes CEOs) transition on and off the board, there’s confidence to be had in knowing that your directors have the support of a governance professional who has maintained a focus on keeping up with evolving governance standards and expectations.
It can also be productive to selectively include members of senior management in your board’s educational undertakings. When your senior executives hear from governance experts that directors are expected to respectfully challenge management assumptions, routinely meet independent of management and so on, such insights help to support good relations between the board and management.
In this industry’s early days of legalization, some licensed producers (LPs) have been grappling with their ability to meet demand. For the short term, board agendas may be dominated by oversight of compliance and production matters, rather than shareholder engagement and voting rights, CEO and directors’ shareholdings and more.
Even so, with the benefit of strong leadership, a young company’s board can commit to an early focus on priorities such as those outlined above. Whatever the sector, boards need to invest time and care in their composition, self-evaluation, education and disclosure practices. Then, as they mature, boards will inevitably establish and act on quantifiable goals that ultimately support governance best practices.