Category Archives: directors

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

Sources:
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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Credit Union Governance and Performance (Video)

In this video, Matt Fullbrook, Manager of the Clarkson Centre, discusses the core findings the research that went into the Centre’s report, “Tracking the Relationship Between Credit Union Governance and Performance”. In it, Matt talks about the following key findings regarding the priorities manifested by the credit union boards the Centre studied:

  1. Credit union boards want to spend more time spent on strategy;
  2. Credit union boards are characterized above all by a deep commitment to meeting the needs of members;
  3. Credit union boards demonstrate commitment to continuing education.

Here’s the video:


(Thanks to the Centre for Credit Union Board Excellence for making this video possible.)

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Proxy Access for Shareholders

We noted with interest a new development south of the border:
SEC Adopts New Measures to Facilitate Director Nominations by Shareholders

According to the text of the new rule (PDF here),

The new rules will require, under certain circumstances, a company’s proxy materials to provide shareholders with information about, and the ability to vote for, a shareholder’s, or group of shareholders’, nominees for director.

Here in Canada, shareholders have long had proxy access — but it hasn’t been used to nominate directors. (For more on that, see this blog entry by Lisa Fairfax: Some Canadian Perspective on Proxy Access.)

This seems to suggest that it’s at least open to question whether American shareholders will actually make use of the opportunity opened up by the new SEC rule. But then, why would there be so much support for the rule if it were truly unlikely to be used? According to another posting by Lisa Fairfax, it all comes down to differences in the rules about solicitation:

…my research suggests that the solicitation exemptions are critical for ensuring the viability of the proxy access rule. Indeed, in Canada, where there is a proxy access rule that goes virtually unused, corporate governance experts note that one of the reasons for the non-use is shareholders’ inability to solicit on behalf of their nominees outside of the limited information printed in the corporation’s proxy statement. In this regard, the fact that solicitation basically requires the filing of a separate proxy statement apparently makes the Canadian proxy access rule unattractive. By comparison, the fact that the new US rules enable shareholders to solicit without such a filing should make the US rules more attractive, and hence more likely to be utilized by shareholders.

Also worth noting: The closest thing we’ve seen to Canadian shareholders using proxy access to nominate directors is found in shareholder proposals that have occasionally been put forward to require nominating committees to nominate more nominees than there are vacancies on the board, effectively giving shareholders a degree of choice. To the best of our knowledge, however, such proposals have never actually been adopted.

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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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