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.
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.
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.
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.
In 2008, CCBE undertook an initial ‘environmental scan’ of SME governance in Canada. Using the criteria for our Board Shareholder Confidence Index (BSCI), we rated 100 SMEs and determined that their adoption of governance best practices was at the same level as the TSX Index in 2002. In other words, SMEs were 5 years behind, so to speak.
The data are summarized in the chart below:
Since then, we have developed a customized SME scoring scheme with criteria designed to touch on challenges facing SME boards and executives. In some cases, there is still overlap with our BSCI criteria for the large-cap TSX Index. The chart below shows our SME sample set in blue (n=113) scored based on our SME criteria, and the TSX Index in red (n=199) scored based on our BSCI. This comparison shows that adoption of best practices is now very close between the two groups.
There remains a gap in three key areas: director share ownership, board evaluations and CEO pay related to performance. This indicates that while improvements have been made by SME boards in structural areas (director independence, committee independence, CEO/Chair split, etc.), there is still much room for improvement in board decision-making and oversight. Large-cap corporations have experienced a significant increase in investor scrutiny, particularly related to executive and director compensation. It isn’t much of a stretch to assume SMEs will begin to feel pressure to catch up.