Recently, the Canadian Coalition for Good Governance (CCGG) released its 2014 Best Practices for Proxy Circular Disclosure. The annual publication, which is intended to provide issuers with guidance on corporate governance and executive compensation disclosure, also includes a list of the CCGG's "Governance Gavel Awards" winners. In determining the winners, which this year includes Canadian Pacific Railway, Pembina Pipeline and Vermilion Energy, the CCGG considered the alignment between an issuer's governance practices and the recommended practices found in its publication Building High Performance Boards.
With respect to the review of disclosure practices, the publication sets out the CCGG's expectations in respect of such issues as majority voting, director independence, board succession, director skills and education, risk management oversight, executive compensation and shareholder engagement, and provides a number of examples of actual disclosure the CCGG deems as "excellent". Such disclosure included examples from Potash Corporation of Saskatchewan, ShawCor and Canadian Pacific Railway.
The following is a summary of guidance provided by the CCGG.
It has been a long-standing position of the CCGG that issuers should adopt majority voting policies. Similar to the r equirements that became effective for TSX listed issuers as of June 30, 2014, according to the CCGG these policies should contain the following important elements:
- directors with more votes withheld than voted in favour of election must submit resignations promptly;
- the board must accept resignations except in special circumstances; and
- the board must announce its decision to either accept or reject the resignation in a press release within 90 days, including reasons for not accepting the resignation, if applicable.
Despite the fact that the outcome of shareholder votes is seldom in doubt for equity controlled companies, the CCGG also recommends that these companies adopt a majority voting policy that would take effect in the event that the proportion of shares held by the controlling shareholder falls below 50%.
The CCGG suggests that voting results be disclosed immediately after a shareholder meeting. Voting result disclosure should be presented in a table or chart and include:
- a detailed breakdown of votes on each motion and on each director election;
- for equity controlled issuers, voting results for the two types of ballots including those cast by the controlling shareholder, and those cast by owners of publicly-traded shares; and
- for issuers with dual class share structures, disclosure of the aggregate voting results, the voting results for multiple voting shares and subordinate voting shares separately.
The CCGG's position on director independence matters is generally in alignment with the best practices adopted by securities regulators under National Policy 58-201 Corporate Governance Guidelines (NP 58-201). Specifically, the CCGG recommends that:
- issuers clearly identify which directors are independent and which directors are not independent and consider holding a portion of each board and committee meeting in camera, i.e. with independent directors only;
- to the extent possible, limit the number of director interlocks on their board, disclose the current number of interlocks, if any, and disclose its policy on director interlocks; and
- ensure that the position of board Chair be separate from the CEO and choose a Chair among the issuer's independent directors. For equity controlled companies, the CCGG believes it is acceptable to combine the positions of CEO and Chair provided that the issuer appoints an independent or "lead director".
In order to provide excellent director independence disclosure the CCGG suggests this disclosure may be presented:
- in a table format which identifies clearly which directors are independent and which directors are not independent, including additional detail, in footnotes or otherwise, outlining directors that were previously not independent; and
- in a table, chart or other format with accompanying description disclose the issuer's policy on director interlocks and indicate the number of director interlocks and which current directors sit together on other public boards.
Director Skills and Education
As provided in NP 58-201 and adopted by the CCGG, issuer boards should have a plan in place for the orderly succession of directors and maintain an evergreen list of candidates. Boards should also identify the key skills required of directors.
The CCGG suggests director succession disclosure may be presented using:
- a skills matrix whereby current directors and their skills are disclosed with specific reference to skills required for an issuer in their particular industry; and
- a table that highlights some of the key attributes of each board member as determined by the responsible board committee.
In line with NP 58-201, the CCGG also recommends issuers ensure and disclose that programs and policies are in place to provide for director continuing education, including reimbursing directors for attending external education events and/or providing management-led education.
The CCGG recommends robust, detailed, well-organized and plain language disclosure on director compensation. Suggested ways to present this disclosure include providing in a table or chart
- a list of the various fees and retainers paid to directors including year-over-year changes;
- the compensation provided to non-executive directors by fiscal year and broken down by fee; and
- director share ownership requirements and current director share ownership.
Executive compensation is one of the most powerful tools that boards have at their disposal for shaping the behavior of company management. Therefore, the CCGG believes that compensation plans should reward performance and properly align with shareholder interests. Moreover, disclosure of a company's compensation plan should clearly describe how it is linked to the company's strategy, both in the long-term and short-term, and its overall objectives.
The role of the board in designing executive compensation, including the key factors considered by the board in designing compensation, should also be disclosed. To this end, executive compensation disclosure should explain how the design of a company's compensation plan and the use of board discretion serve to discourage risk-taking beyond the company's acceptable risk appetite, including the use of:
- caps on payouts;
- performance thresholds;
- long-term vesting provisions;
- an anti-hedging policy that prohibits directors and officers from hedging their equity exposures; and
- a clawback policy that permits the company to recoup compensation already awarded in certain circumstances.
Issuers should also contemplate providing disclosure regarding the variability of executive compensation. This disclosure should be provided in text, table or chart format disclosing:
- what proportion of target total compensation to an executive is variable;
- what the range of potential payments are under each variable compensation payment; and
- vesting provisions applicable to share based compensation.
Excellent executive compensation variability disclosure might also illustrate in table or chart format:
- each component of compensation or form of award;
- each component or award's purpose;
- performance period, if any;
- how the value of the award is determined;
- how the award is settled;
- risk of payout; and
- proportion of total direct compensation.
To better provide shareholders' with an understanding of the effectiveness of an issuer's compensation program the CCGG believes that shareholders need to be able to gauge how effectively an issuer's compensation program has actually been in aligning management's interests with shareholders. Therefore, the CCGG suggests compensation disclosure should include:
- a discussion of whether a board considers outstanding and realized equity awards when considering future equity awards;
- a table or chart showing the realized value of past compensation awards;
- a chart comparing compensation awards against the actual results of key performance metrics used in the compensation plan; and
- affirmation of any forward-looking stress tests the board may have conducted when making compensation decisions and the results of those tests.
The CCGG also believes that issuers should provide adequate disclosure regarding the employment agreements between an issuer and its NEOs. Issuers should disclose answers to the following questions in text, table or chart format:
- Does the company have employment agreements with its NEOs? What are the material terms of the agreements?
- What payment, if any, is awarded...
- ...if a NEO resigns?
- ...if a NEO is terminated without cause?
- ...if a NEO is terminated without cause after a change of control occurs?
- ...if a change of control occurs but a NEO is not terminated?
- How a change of control is defined? Are change of control provisions "double-trigger"?
- What payments would be made to NEOs under each termination scenario if their employment had been terminated at year-end?
Above and beyond the recommendations adopted by the Canadian Securities Administrators, the CCGG also recommends that issuers adopt share ownership requirements for its NEOs to better enhance the alignment of interests with a company's shareholders. To satisfy this recommendation excellent disclosure should address the following questions which can be presented in text, chart or table format:
- What are the minimum share ownership requirements that each NEO must meet?
- Are NEOs required to maintain minimum share ownership levels for any period of time after leaving the company?
- What are each NEO's current shareholdings relative to the required holdings level?
- Do in-the-money option grants and unvested equity grants count towards an NEO's minimum ownership requirements?
The CCGG also recommends holding a shareholders' 'Say on Pay' vote as a useful tool to help issuer boards assess shareholders' acceptance of the company's approach to executive compensation. According to the CCGG, 'Say on Pay' votes should be held once every year, at an issuer's annual meeting with further opportunity to comment on an issuer's executive compensation program through web based surveys and other investor surveys provided by the issuer and discussed below.
Executive Oversight and Risk Management
The CCGG recommends that issuer boards disclose the processes used that enable them to identify and monitor risk management efforts.
In any of text, table or chart format, ideally disclosure should include:
- a perspective from the board on the primary risks facing the company with particular attention paid to high-priority risks;
- a brief explanation of the board's involvement in defining the company's risk appetite and overseeing risk management;
- how the board delegates and carries out its risk management oversight responsibilities;
- how the board independently validates and scrutinizes the perspective presented by management on key risk issues; and
- if the issuer board has established a separate committee that oversees risk, disclosure regarding that committee's role in overseeing risk.
While the CCGG recognizes that many issuers are able to reach out and engage with large institutional shareholders for in-person meetings, the CCGG believes such meetings are often impractical. To this end, a few excellent examples of shareholder engagement tools used by issuers and disclosed in their circulars include:
- live streaming of annual meetings and other meetings of shareholders of the issuer;
- annual investor surveys;
- web-based surveys to provide feedback on executive compensation levels; and
- easily accessible investor relations contact information.
Other Recommended Tools for Disclosure
When preparing proxy circulars, the CCGG suggests issuers use plain language and employ tools which give the document structure, ensure flow and communicate information meaningfully.
Issuers should consider whether their disclosure documents are organized in a logical flow so that information continues to build upon itself and does not jump back and forth between topics.
To allow for greater flow and organization descriptive headings and subheadings should be used to allow readers to quickly find the information they are seeking and break up the document into more manageable pieces. Similarly, effective disclosure by some issuers provides summary overviews of each major section while others may use highlighted boxes and other formatting tools to draw readers' attention to main ideas.
The use of charts, tables or images to explain complicated or detailed information wherever appropriate is suggested. Visual aids can explain information more fully and easily than text alone and may help to divide the document into smaller pieces for easier reading. Jargon that confuses the message is unnecessary and where it is necessary or best to use industry or technical information, definitions and explanations should be provided.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.