CCBE Has Changed Addresses

The CCBE had a very busy September.  On top of all of the work we made a very smooth transition back to 105 St. George St. and into the new Rotman building after spending several years down by Queen’s Park.

Our website address has changed as well, and with a new look no less!  You can either:

  1. Follow the link from the main page (, by hovering over “Faculty and Research” heading and finding us under the “Research Institutes” column in the drop-down.
  2. Go directly by entering the following address:

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Pay for Performance Observations 2011

By: Antonio Spizzirri

In 2009, the Clarkson Centre for Board Effectiveness (CCBE) began observing pay and performance for firms on the S&P/TSX Composite Index (TSX Index).1 CCBE has continuously tracked pay and performance data since 2004 for over 300 Canadian large public firms. For the purposes of this report, we observe 200 firms who were listed on the TSX Index in 2011 and for which 7 continuous years of pay and performance data are available. The impact of the financial crisis can be seen in our TSR observations for two years (2008-2009) of our sample. The average annual TSR in 2008 is the lowest in our observation period at -31.64% which was followed by the highest average annual TSR of 36.51% in 2009, suggesting an immediate overall rebound. However, despite the negative impact of the financial crisis, overall CEO pay and performance over the 6-year 2005-2010 period were aligned.

Publication can be found here.

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The Significance of Index Tenure and the 2008 Financial Crisis

By: Sophie Langlois

The Clarkson Centre for Board Effectiveness (CCBE) has tracked CEO pay and performance alignment for firms on the S&P/TSX Composite Index (TSX Index) since 2004. Overall, data shows that CEO pay and share performance move in the same direction in the long-term. This trend is, however, less apparent in the short-term. To better understand pay and performance alignment in the short-term, this report focuses on a crucial observation period: the 2008 financial crisis; a year where total average TSR of the TSX Index plunged to -32%.

In an era of increased shareholder scrutiny enhanced by the introduction of corporate governance practices such as, “Say on Pay,” this paper examines patterns in CEO pay and performance alignment in the short-term and whether tenure on the S&P/TSX Composite Index influences compensation behavior. For the purposes of this report, CCBE looked specifically at how TSX Index boards reacted to the 2008 financial crisis. How did long-tenured firms align their CEO pay with financial performance relative to short-tenured firms and firms with eventual-tenure?

Publication can be found here.

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Top 5 Concerns of Corporate Directors

Top 5 Concerns of Corporate Directors

Here are the top 5 concerns expressed by Canadian corporate Directors, as synthesized from research conducted by the Clarkson Centre.

Strategic Planning/Risk Management

A Board’s role in strategic planning is key to the long term success of a corporation. Many Canadian Directors believe that their Boards do not allocate enough time to strategy in Board meetings to ensure effective strategic planning. In addition, many Boards do not have the skills and expertise to fully understand the business/industry and drive strategy. Agenda management, Board composition and effective information sharing between Boards and management are fundamental to a Board’s ability to provide effective oversight on strategic planning.1

Board Independence

In order for shareholders’ interests to be optimally represented by the Board of Directors, individual Directors must be able to act independently from the interests of management, and independently from the other Directors on the Board. Material relationships with management increase the potential risk that a Director will put executive interests before those of the shareholder. Optimizing Board independence helps to mitigate the effects of conflicts of interests between management and the Board and better aligns the Board’s decisions with shareholder interests.2

Top Executive Compensation

Boards of Directors are solely responsible for the compensation of the CEO. In order to best align the interests of management and shareholders, compensation must be linked to the company’s financial performance. Board expertise in the area of executive compensation is crucial to establishing top executive compensation, particularly in setting meaningful performance metrics that incentivize to strive for strong performance in the short, medium, and long terms. With increased scrutiny by markets and investors since 2008, many Boards are struggling to design pay packages that can attract and retain top management, while ensuring ongoing confidence among the investing public.3

Top Executive Succession Planning

Many Directors insist that the hiring and firing of the CEO is a Board’s most important responsibility. Boards often do not have formal, ongoing plans in place for the succession of the CEO, either in normal or in unexpected circumstances. Sometimes Boards feel a lack of urgency because their current CEO is highly effective. In other cases, Boards find it culturally awkward to broach the subject of a CEO’s departure. Regardless of the cause, however, Directors are experiencing increasing internal and external pressures to formalize the CEO succession process.4

Board Renewal/Diversity

A formal Board renewal process provides Boards with an effective tool for Boards to understand whether and when turnover is needed, as well as whether or not the current balance of skills on the Board is appropriate for the organization’s strategic reality. The primary goal of Board renewal is to maintain an effective and passionate Board. Formal processes for Board renewal are a powerful tool to enable the achievement of this goal. Boards are facing increased scrutiny from shareholders and other stakeholders to increase gender and ethnic diversity. Directors have expressed that increased Board diversity can increase the effectiveness of Board decisions. However, Boards struggle to increase gender and ethnic diversity while seeking the best available candidate to fill the Board seat.5

1. Clarkson Centre – PricewaterhouseCoopers 2009 Directors Survey in collaboration with the Institute of Corporate Directors and Tracking the Relationship Between Credit Union Governance and Performance
2. Split CEO/Chair Roles: The Gateway to Good Governance?, Majority Voting in Canada: 2006-2011 and Board Shareholder Confidence Index
3.Pay for Performance Observations 2011 and Before & After Say on Pay in Canada: 2009 – 2011
4. Clarkson Centre SME Toolkit #3: Executive Succession Planning and
Beyond the CEO: The Role of the Board in Ensuring Organizations have the Talent to Thrive
5. Clarkson Centre – PricewaterhouseCoopers 2009 Directors Survey in collaboration with the Institute of Corporate Directors,
Tracking the Relationship Between Credit Union Governance and Performance
Majority Voting in Canada: 2006-2011

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Say on Pay: the SEC’s New Rule

The SEC announced today a rule requiring corporations publicly traded in the US to hold non-binding “Say on Pay” votes at least once every three years. As is already the case in the UK, where Say on Pay has been mandatory since 2004, this move provides investors with an opportunity to formally voice concerns over problematic executive pay packages. After 6 years, engagement between boards and shareholders in the UK has increased in frequency and sophistication and has ultimately improved disclosure around executive pay (see “Say on Pay, 6 Years on: Lessons From the UK Experience”). It remains unclear, however, if Say on Pay will have a long-term impact on pay/performance alignment. This is also true in Canada, where an increasing number of publicly traded corporations are voluntarily adopting Say on Pay.

CCBE will be monitoring the impact of US Say on Pay closely in coming years.

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Clarkson Scholar a “Thought Leader” in Trusworthy Business

The Clarkson Centre is pleased to announce that Visiting Scholar, Chris MacDonald, has been named one of the “Top 100 Thought Leaders in Trustworthy Business Behavior” for 2010, by Trust Across America.

According to Trust Across America,

“The Top 100 Thought Leaders represents the culmination of two years of research. Trust Across America sought the counsel of and requested nominations for this honor from over 150 professionals across the nation. The list was narrowed through an extensive vetting process.”

Congratulations, Chris!

(Make sure to check out Chris’s Business Ethics Blog.)

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Stock Options and Institutional Investors

Stephen Jarislowsky, CEO of investment firm Jarislowsky Fraser Ltd., was recently interviewed by the Globe and Mail’s Report on Business. (See “Why Jarislowsky thinks stock options are dangerous.”) One of his key points has to do with the role of institutional investors in effecting positive governance change in Canada.

The way stock options are reported is a good example of the difference between regulatory change and effects of pressure from institutional shareholders, one that we at the Clarkson Centre have seen in our own research.

In 2008, there was a legal requirement, as part of the compensation disclosure rules, that each company disclose the value of option gains realized by each Named Executive Officer during the most recent fiscal year. But starting in 2009, the CSA reworked the compensation disclosure and removed the requirement to disclose Option Gains. As a result, since Option Gains disclosure is no longer required, only 16.6% of companies listed on the S&P/TSX Composite Index this year disclosed the value of option gains (and that number includes companies that had no options outstanding or no options exercised during the year so they were given credit by default as the options gains were obviously $0). So, where option gains disclosure was previously available for 100% of companies, it has fallen off dramatically with the removal of the regulatory requirement.

Conversely, the process for Director Elections in Canadian companies has been improving year-over-year despite the lack of a change in regulatory requirement. The current minimum requirement is that shareholders be allowed to vote “For” or “Withheld” for their board of directors. There are two problems with this. First is the fact that, since shareholders are not able to vote “Against”, then a director’s election is carried with even a single vote “For” (which hardly counts as a ringing endorsement). Secondly, many companies still use a ‘slate’ voting structure, under which shareholders can only vote “For” all or none of the directors. There is no option to vote “For” individual directors unless the company voluntarily chooses to hold elections in that way.

Since 2004, however, due in large part to the support of institutional investors such as the Ontario Teachers’ Pension Plan and the Canadian Coalition for Good Governance, more and more S&P/TSX Composite Index-listed companies are implementing a majority voting policy that not only allows shareholders to vote for individual directors but also counts votes “Withheld” as a vote against the director. In cases where a director receives less than 50% of votes cast “For”, that director must submit their resignation for the board’s consideration. In 2010, more than 50% of Index-listed companies in Canada have such a majority voting policy in place, and this is in large part due to institutional investors pushing for positive governance change, encouraging companies to do more than the bare minimum required.

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Filed under best practices, compensation, corporate governance in the news, elections, stock options

Governance and Ethics: Why Everyone Should Care About Governance

Chris MacDonald, Ethics BloggerClarkson Visiting Scholar Chris MacDonald recently published this commentary on the connection between corporate governance and ethics: Why You Should Care About Corporate Governance.

The main point of the piece is that corporate governance is fundamentally a matter of ethics, and that, further, governance issues have implications far beyond their impact on the shareholders they are typically thought of as protecting.

…corporate governance isn’t just about laws and regulations, and it’s not a concern just for folks on Bay Street. It is also a matter of ethics, and it should be a matter of concern to the public generally.

Governance is fundamentally about who is responsible to whom, and for what, and under what conditions. At a well-governed company, the actions of employees, and especially those of senior executives, are driven by the values that ought to drive their actions. They are not driven by personal greed, or nepotism, or cronyism. Good governance practices are intended to make it more likely that those who carry out the company’s work will act upon their ethical obligations….

Chris’s bottom line:

And regardless of your perspective on corporate governance, it is impossible to deny that the way decisions get made, and the interests that corporate policies encourage decision-makers to serve, are ethically important matters.

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Board Shareholder Confidence Index, 2010

The Clarkson Centre is pleased to announce the arrival of its 2010 Board Shareholder Confidence Index, which rates all corporations listed on the S&P/TSX Composite Index.

You can find this year’s Index, along with past years’ results, here: Board Shareholder Confidence Index.

The BSCI is based on the kinds of factors that active shareholders use in assessing Boards of Directors in terms of their adherence to corporate governance best practices.

A couple of things are worth noting. First, our yearly Index isn’t a ranking. We assign each company a letter grade (from C to AAA+), based on a clear set of criteria, but we don’t rank-order them.

Second, as we often do, we’ve altered our methodology somewhat this year. We now reward firms that disclose the value of option gains. While boards are currently subject to a regulatory requirement to disclose a ‘grant date fair-value’ for options awarded to executives during the most recent fiscal year, the requirement to disclose the value of option gains for the year was removed a couple of years ago. We included disclosure of option gains in our scoring system because we feel that disclosure of actual gains will give a clearer impression to shareholders of how compensation has been affected over time.

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Proxy Advisory Firms

This year’s Board Games report is accompanied by an excellent feature article on the role of proxy advisory firms.

Here’s the story Jane McFarland: Proxy advisory firms flexing some serious muscle.

The story focuses on North America’s biggest proxy advisory firm, Institutional Shareholder Services Inc., and the controversy over the quality and transparency of ISS’s advice, along with the amount of influence the company has.

The story quotes the Clarkson Centre‘s Chairman and Director, David Beatty:

“It’s deeply ironic to me that the whole motion toward shareholder responsibility has ended up in the hands basically of one firm whom people accept advice from,” says corporate director David Beatty, who chairs the board of Inmet Mining Corp. and also acts as an adviser to ISS competitor Glass Lewis & Co. LLC.

“By and large, the votes of $10-trillion of assets under management are determined in the first instance by one company. … It’s too much power in one place, and a total abrogation of power by everyone else.”

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