Category Archives: best practices

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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Filed under best practices, compensation, governance, performance, TSE

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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Filed under best practices, compensation, say on pay, shareholder votes

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

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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Board Games, 2010

Today the Globe and Mail released its 9th annual corporate governance rankings: Board Games 2010: Rankings for corporations

We’re proud to say that this year’s Board Games rankings are based on data gathered and analyzed by our research team here at the Clarkson Centre, as they have been for several years now.

The top end of the rankings is, once again, dominated by the financial industry. Though it’s hard to establish a direct causal connection, the fact that Canada’s financial institutions perform so well in terms of corporate governance may well have something to do with the fact that Canada has managed to ride out the recent financial storm that has battered so much of the rest of the developed world.

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Disclosure About Executive Pay

Yesterday’s Globe & Mail featured an interesting item on disclosure regarding executive pay. By Janet McFarland: Securities regulator urges more disclosure about executive pay

The story quotes the Clarkson Centre’s own Matt Fullbrook:

Matt Fullbrook, manager of the Clarkson Centre for Business Ethics and Board Effectiveness at the University of Toronto, said the potentially biggest amendment could be a new requirement for companies to disclose how the board of directors considered risks associated with the company’s compensation policies – for example, if a pay practice could potentially encourage an executive to take excessive risks.

Mr. Fullbrook said too few companies put meaningful information in their proxy circulars about the considerations that go into their compensation design.

“It’s a piece that is a glaring omission,” he said.

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Succession Planning (at Twitter, and Elsewhere)

“Succession planning” in the world of business basically refers to the process of planning for the day when a change of CEO is required.

Here’s a fascinating piece on succession at tech wunderkind Twitter, by Claire Cain Miller, for the NY Times: Why Twitter’s C.E.O. Demoted Himself

Twitter has become one of the rare but fabled Web companies with a growth rate that resembles the shape of a hockey stick. It has 175 million registered users, up from 503,000 three years ago and 58 million just last year. It is adding about 370,000 new users a day.

Yet for all its astonishing growth, Twitter has succeeded in spite of itself — the enviable product of a great idea and lightning-in-a-bottle viral success rather than a disciplined approach to how it’s managed.

Last month, [co-founder Evan Williams] unexpectedly announced that he had decided to step down as chief executive and give the job to Dick Costolo, who had been Twitter’s chief operating officer…

The issue of CEO succession is an interesting one. At young, fast-growing companies like Twitter, it can be an acute problem. Start-up companies in I.T. and biotech are often guided through their first few years by CEOs who are technical geniuses — computer geeks or research scientists — who eventually realize that they don’t have the management skills to shepherd the company beyond its infancy. Giving up control is notoriously difficult for these smart, ambitious people. But doing so is often crucial if the powerful ideas that got the company off the ground are really going to take it somewhere.

Here at the Clarkson Centre, when we do our annual governance rankings, succession planning is one of the relevant measures. Having a formal plan in place for how a CEO is to be replaced is considered important. And hiring the CEO from within the company’s own ranks is considered a plus — it’s a sign that the company is thinking ahead, and grooming potential CEOs well in advance of their being needed.

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Filed under best practices, CEO, corporate governance in the news, succession