Category Archives: corporate governance in the news

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

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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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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Trend Watch: How are Directors Elected?

Voting systems to elect corporate directors vary along two major dimensions. First, shareholders can be offered either a) an entire slate of candidates, who stand or fall together, or b) a list of individual candidates, each of whom stands or falls on his or her own merits. Individual director voting empowers the shareholders to indicate which directors they are happy with instead of just voting for the whole board of directors

Secondly, there is the distinction between ‘plurality’ and ‘majority’ voting. Under the plurality system, each shareholder has the option of either voting for or instead withholding approval from, those directors. Withholding doesn’t technically count as a vote against. But if anyone — even a single shareholder — votes “yes”, then the directors are successfully elected. Under the competing majority voting system, directors need to receive 50% of votes +1 in order to be elected. The latter is generally considered preferable by governance advocates. The Canadian Coalition for Good Governance has been at the forefront and have championed Majority Voting. Here are the CCGG’s Majority Voting Guidelines.

Our research here at the Clarkson Centre shows the trends along both of those dimensions.

First, here’s what our data show regarding the trend from slate voting towards individual director voting:
The prevalence of slate voting has been on a steady decline since 2004, and it’s particularly obvious in the trend shown since 2006. Currently, only about 14% of the companies on the S&P/TSX Composite use a Slate vote for director elections.

Next, here’s what we’ve seen in terms of the trend from plurality to majority voting:
Majority voting adoption of the Corporations on the S&P/TSX Composite has more than doubled over the last 4 years.

For an example that illustrates the struggle to implement best practices in this area, see this recent story, from the Globe and Mail: Linamar board gets the message, finally.

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March 31 2009

It’s always interesting to read about corporate governance issues from the perspective of someone who doesn’t live the stuff day-in and day-out: in Saturday’s Globe & Mail, Christie Blatchford on the corporate culture of entitlement. On the growing push for CEO/Chair splits in the US. On how bailouts have affected governance of companies such as GM, whose CEO was just ousted. More here: “We now know that the “old-fashioned” governance construct of directors appointing management, and shareholders electing directors, is out-the-window if a company accepts federal funds.” Manulife’s payout to departing CEO “a misreading of the zeitgeist”. Jim Shaw of Shaw Communications profiled, providing a good look into a family-run company. And Livent execs found guilty— after ten years.

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