Davies Governance Insights. Carol Hansell Jason Saltzman

Transcription

1 Davies Governance Insights Carol Hansell Jason Saltzman January 25, 2012

2 Overview Purpose of the Report Methodology Understanding What Influences Governance Practices Director Profile Board Structure Director and CEO Compensation Shareholder Democracy Issues 2

3 Purpose of the Report Provide our clients with insight into corporate governance practices and trends While each issuer must develop governance practices that are appropriate for it, trends among other issuers can provide a valuable point of reference for boards and management teams Gives us the ability to provide clients with empirical benchmark to peers and TSX Composite, generally 3

4 Methodology Reviewed the 2011 management information circulars available for 360 TSX issuers on the Composite Index and the SmallCap Index Supplemented data with our expertise in governance 4

5 Understanding What Influences Governance Practices Regulatory very little prescribed by statute U.S. Developments U.S. rules (SEC, NYSE and Frank-Dodds) are much more prescriptive not all rules apply to "foreign private issuers" though companies often voluntarily follow U.S. rules International Trends U.S. trends are most followed, but investors invest worldwide (for e.g., say-on-pay comes from non-n.a. markets) Financial Institution Leadership financial sector often provides leadership in Canada Proxy Advisory Firms firms such as ISS and Glass Lewis can influence shareholder voting 5

6 Director Profile

7 Overview To establish governance practices appropriate for each board, it is important to understand who serves on boards 7

8 Overview (cont'd) Boards should consider if there is: enough/too much independence from management the right mix of ages and genders enough global presence on the board 8

9 Residency Canadian statutes require at most 25% Canadian membership on boards, yet approximately 80% of board members are Canadian Of the roughly 20% non-canadians, about 2/3 are from the U.S.; UK (8%) and Australia (5%) Given the global nature of companies, is this enough nonresidents? 9

10 Gender Board members are predominantly men Women not typically on boards, other than TSX 60 issuers 88% of TSX 60 issuers put at least one woman forward in 2011 proxy season (68% put two or more) 57% of other issuers on the balance of the Composite Index and 65% of SmallCap Index issuers did not put any women forward Of the 360 issuers reviewed, only seven are chaired by women Of the 1,500 board committees reviewed, only 53 are chaired by women 10

11 Director Independence Canadian boards are highly independent (appx 77%) Typically, only non-independent director is the CEO Boards need to consider whether they would be better to sacrifice some independence to enhance industry knowledge on the board 11

12 Age A significant majority of Canadian directors are 60 years of age or over TSX 60: 65% Completion Index: 56% SmallCap: 52% 12

13 Board Renewal Very few boards have term limits (only 9 from TSX 60) Directors on Composite Index boards have served for approximately 8 years; SmallCap for 7 years Very modest turnover of directors in 2011; roughly threequarters put forward only incumbents Based on current board compositions and tenure statistics, do not expect turnover to change significantly in coming years 13

14 Board Structure

15 Board Size Size of Canadian boards correlates to a number of factors, including market cap and complexity of the issuer s business TSX 60 Average size is 12 virtually all have at least 9 board members 44% have 12 or more Completion Average size is 9 less than 1/2 have 9 or more board members 57% have 7-9 Small Cap Average size is 8 less than 1/3 have 9 or more board members 58% have

16 Board Leadership Separation of CEO and Chair is one approach to supporting the independence of the board from management Where positions of CEO and chair have not been separated often appoint a lead director Approximately 60% of Composite issuers have separated CEO and chair. Of those that have not, about 2/3 have a lead director About 50% of SmallCap issuers have separated CEO and chair. Of those that have not, about 1/2 have a lead director 16

17 Board Leadership (cont'd) 17

18 Board Committees Canadian companies are only legally required to have an audit committee Virtually all also have compensation committee and governance and nominating committee Sector-specific committees include environmental, health and safety (mining); reserve (energy); and conduct review (financial services) Executive committees have become increasingly uncommon, reflecting trends both towards smaller boards, and efforts to be more inclusive of all directors 18

19 Risk and Strategy Oversight Risk oversight is one of biggest topics in governance Still debate as to who should oversee risk TSX 60 issuers commonly assign risk oversight to a committee (usually audit committee or a risk committee) Issuers on the Completion and SmallCap Indices overwhelmingly reserve risk oversight to the full board Oversight of strategy is almost always dealt with by the full board 19

20 Director and CEO Compensation

21 Director Compensation - Overview Canadian law entitles directors to set their own compensation No shareholder approval is required though CCGG recently (Feb. 2011) recommended it be subject to periodic shareholder approval Directors typically receive retainers plus meeting fees (some pay just flat fee i.e. no meeting fee) Common to get share based compensation as part of, or in addition to, retainer 21

22 Director Compensation - Retainers Most TSX 60 directors received retainers of at least $50,000 - a significant percent received $100,000 or more Vast majority of Completion & SmallCap directors received $50,000 or less Most TSX 60 chairs received at least $250,000 and a few earned $500,000 or more Completion and SmallCap chairs typically received $150,000 or less Committee chairs usually received an additional retainer 22

23 Director Compensation Meeting Fees TSX 60 directors received $1,600 per meeting Completion and SmallCap directors received $1,100 and $1,000, respectively, per meeting 23

24 Director Compensation Stock Compensation Directors often receive share based compensation in lieu of, or in addition to, cash payments Stock option compensation is more common among smaller issuers but very uncommon for large issuers (only 3 TSX 60 issuers) Majority of Composite Index directors received DSUs; only 26% of SmallCap received DSUs Almost all TSX 60 companies impose shareholding requirement on directors. About 69% of Completion Index and 44% of SmallCap Index do the same Typically share-based compensation counts 24

25 CEO Compensation - Overview CEO Compensation is typically set by Compensation Committee or Board Committee often retains compensation consultant to do compensation analysis CEO typically receives salary, cash bonus and stock based compensation Other compensation such as car allowance and insurance are often provided 25

26 CEO Compensation Cash Compensation TSX 60 CEOs averaged $2.88 million in cash-based compensation (37% as base salary and 63% as bonus) Completion Index CEOs averaged $1.37 million in cashbased compensation (40% as base salary and 60% as bonus) Small Cap Index CEOs averaged $1.22 million in cashbased compensation (37% as base salary and 63% as bonus) 26

27 CEO Compensation Stock Compensation Share-based compensation was typically awarded to CEOs, subject to time vesting, performance vesting or both Approximately 80% of TSX 60 CEOs received stock-based compensation subject to performance vesting, where only 51% of the remaining issuers received the same 27

28 CEO Compensation Stock Compensation (cont'd) Significant difference in the use of options, phantom stock units (RSUs and DSUs) and SARs 28

29 CEO Compensation Stock Compensation (cont'd) Almost all TSX 60 companies impose a shareholding requirement on CEOs (average multiple of 4.5x salary) About 2/3 of Completion Index (3.2x multiple) and only 30% of SmallCap issuers (3.0x multiple) do the same Typically, CEOs are able to count share-based compensation towards holding requirement 29

30 CEO Compensation Change of Control Awards Most issuers offer a change of control payment Almost all change of control awards were "double trigger" Only 2% of Composite Index issuers and 6% of SmallCap Index issuers offered "single trigger" award Payout typically ranges from 200% - 250% of CEO's cash compensation 30

31 Shareholder Democracy Issues

32 Shareholder Engagement With Directors Shareholder interface with director has changed fundamentally in past 10 years CCGG has adopted a formal Board Engagement Strategy whereby it requests meetings with board members Proxy contests often start as "friendly" meetings between board and shareholders 32

33 Say-on-Pay "Say-on-pay" is an advisory vote by shareholders on the executive compensation philosophy and practices of the issuer for the previous fiscal year Started in Canada in 2010, and is quickly gaining momentum Almost all use CCGG recommended form of resolution Majority of TSX 60 issuers put say-on-pay to shareholders - likely to increase to at least two-thirds in 2012 Completion Index issuers have been much slower to embrace say-on-pay Has barely hit radar screen of SmallCap issuers 33

34 Majority Voting Corporate statues provide for slate voting Typically votes are for nominees or withheld, such that a nominee only needs one vote to be elected Majority voting is not required in Canada but has become the norm for large issuers There are three key elements to majority voting: Abolition of slate voting Disclosure of the results for each director Establishing consequences if a majority of votes is withheld 34

35 Majority Voting (cont'd) Vast majority of Composite Index (87%) and SmallCap (80%) issuers have abolished slate voting 88% of TSX 60 issuers reported results for director election Only 59% of Completion Index and 48% of SmallCap Index reported such results Almost all TSX 60 issuers have a policy dealing with the resignation of a director where he or she receives a majority of votes withheld A little more than 1/2 of the Completion Index and about 1/3 of SmallCap have the same 35

36 Shareholder Proposals During the 2011 proxy season 72 proposals were made to 25 issuers, 20 were withdrawn and only two succeeded 54 of these proposals were made by four entities in the form of eight different proposals to multiple companies Only 18 were issuer specific made to 14 issuers 36

37 Proxy Voting Issues - Proxy Voting System Proxy voting system in Canada is flawed in its design and operation Raises questions about the quality of the shareholder vote In October 2010, Davies released a discussion paper on the matter, prompting a broader discussion among stakeholders and participants, including several roundtables and conferences In 2011, the OSC solicited comments on whether action needs to be taken with respect to the proxy voting system The vast majority of respondents supported a review of, or significant changes to, the system 37

38 Proxy Voting Issues Proxy Advisory Firm Influence Issuers are very concerned with the influence proxy advisory firms have on voting One major concern is standard voting instructions Another major concern is that proxy advisory firms do not always analyze public disclosure documents accurately We expect the influence of proxy advisory firms to continue to be a prominent issue in Canada in the next few years 38

39 Questions? 39

40 Contact Information Carol Hansell Jason Saltzman