The Canadian Securities Administrators (CSA) has tightened its executive compensation disclosure requirements and is requiring additional disclosure regarding the qualifications of the compensation committee, the consideration of risks associated with the company's compensation practices and fees paid to compensation consultants. Canadian banks will be among the first to contend with the new changes as the amendments apply to companies with a fiscal year ending on or after October 31, 2011.
The final amendments are generally consistent with the changes proposed by the CSA in November, 2010 and reflect not only some of the rules adopted by the U.S. Securities and Exchange Commission in response to the Dodd-Frank Wall Street Reform and Consumer Protection Act, but also concerns raised over the last two years respecting compliance with the spirit and intent of the Canadian executive compensation disclosure rules. The specific changes from existing Canadian executive compensation disclosure requirements are:
New disclosure requirements
Qualifications of compensation committee – Companies must identify each committee member, state whether each member is or is not independent and describe the experience of each member relevant to his or her responsibilities on the committee. In addition, companies must describe the skills and experience of the committee that enable it to make decisions on the suitability of the company's compensation policies and practices.
Risks associated with compensation – Companies must state that the board or its compensation committee considered the implications of the risks associated with the company's compensation policies and practices and describe the nature and extent of the role of the board or committee in the oversight of such risks, any practices used to identify and mitigate the risk that an NEO or individual at a principal business unit or division might take excessive risks, and any identified risks that are reasonably likely to have a material adverse effect on the company. (As an alternative, a company can simply state that neither the board nor any committee considered such risks, but a company would not be well-advised to do so.) The CSA has provided a non-exhaustive list of situations that could potentially encourage excessive risk-taking.
Board's compensation consultant – If a compensation consultant was retained to assist the board or compensation committee in determining compensation for executives or directors, the company must disclose the consultant's name and the date originally retained and summarize the consultant's mandate. If the consultant has also provided services to the company, its affiliates or any of the company's directors or members of management, the company must say so, describe the nature of such work and disclose whether board or compensation committee pre-approval is required before the consultant or its affiliates may provide services to the company at management's request. (Although the form states that disclosure is required only for compensation consultants retained subsequent to the most recently completed financial year, we understand this is a drafting error and that the intent was to require disclosure for compensation consultants retained since the beginning of the most recently completed financial year.) In addition, for each compensation consultant retained over the last two completed financial years, the company must separately disclose the aggregate fees billed by the consultant and its affiliates for services relating to determining the compensation of the directors and executive officers and the aggregate fees billed for all other services provided by the consultant and its affiliates, together with a description of the nature of such other services. These disclosure requirements are in addition to the requirements under Form 58-101F1 to identify all compensation consultants retained by the company to assist in determining compensation of executives and directors and to describe their mandates.
Other new disclosure requirements:
- Disclose significant changes to compensation policies which the company has committed to make in the next financial year.
- Disclose whether or not an executive officer or director is permitted to hedge against declines in the market value of equity securities received as compensation.
- Disclose the aggregate value of vested share-based awards which have not yet been paid out.
Narrowing and clarifying existing requirements
Restrictions on the ability to omit disclosure of performance goals due to "serious prejudice" – Companies must now explicitly state when they are relying on the exemption from disclosing performance goals on the basis that disclosure would be seriously prejudicial and explain why disclosure would be seriously prejudicial. Moreover, a company is not considered to be seriously prejudiced if the performance goals to be disclosed are based on broad corporate-level financial performance metrics, such as earnings per share, revenue growth and earnings before interest, taxes, depreciation and amortization.
Companies are now prohibited from adding columns to the Summary Compensation Table.
Ability to exercise discretion – There is now an explicit requirement to disclose whether the board can exercise discretion to reduce or increase payouts with respect to performance-based compensation.
Other clarifications and changes:
- Companies must provide clear and concise disclosure that provides a reasonable understanding about how compensation decisions are made and how specific named executive officer and director compensation relates to the governance of the company. This is a challenge given the prescriptive nature of the rules.
- Existing requirements to disclose the process used to grant option-based awards and to disclose whether prior grants of option–based awards were considered when making new grants now also apply to share-based awards.
- The CSA reconfirmed that the full fair value of share-based awards and option-based awards is to be disclosed in the Summary Compensation Table in the year the award was granted, even if it is multi-year award.
- The methodology and assumptions used to calculate share-based and option-based awards must be disclosed in a footnote to the Summary Compensation Table even if they are identical to those set out in the company's financial statements. The company may not incorporate by reference disclosure included in the company's financial statements.
- Although amounts must be reported in the prescribed tables using the same currency that the company uses for its financial statements, this currency restriction does not apply to other compensation disclosure.
- The CSA provides guidance on the calculation of the annual lifetime pension benefit payable at the end of the most recently completed financial year.
- Companies no longer need disclose non-compensatory defined contribution pension amounts.
- If, instead of participating in a pension plan, executives receive company contributions to a personal retirement savings plan, the company contributions need only be included in "All other compensation" in the Summary Compensation Table.
No obligation to disclose gains realized on exercise of options
As the focus of executive compensation disclosure is the board's compensation decisions and not the investment decisions of executive officers, the CSA did not amend the executive compensation disclosure rules to require companies to disclose amounts actually realized by named executive officers from the exercise of options during the year, even though institutional shareholders urged them to do so.
Andrew J. MacDougall is a partner at Osler, Hoskin & Harcourt LLP and practices corporate and securities law, with a particular focus on mergers and acquisitions and corporate governance. Elizabeth Walker practises corporate and securities law with an emphasis on private and public corporate finance matters, mergers and acquisitions and corporate governance.
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