Upload
doannguyet
View
217
Download
2
Embed Size (px)
Citation preview
Corporate governance
& executive pay report
What is the state of corporate governance in Canada today? Has the flurry of recent measures aided or hindered the economic recovery? Hay Group recently interviewed a number of Canadian organizations and regulators to gauge common attitudes towards corporate governance and executive pay today.
Canada
2012
© 2012 Hay Group. All rights reserved.
Contents
Introduction 1
Our approach 2
Executive summary 3
The Canadian corporate governance movement 4 Current attitudes and future perspectives
Key corporate governance issues
Who determines good and bad corporate governance?
Stakeholder engagement
The influence of proxy advisors on corporate governance
Compliance and value creation 14 Corporate governance and risk-taking
The role of corporate culture
Fostering sustainability
The role of executive pay 18 Incentive linkage
Drivers of executive pay
Justifications for executive pay
The variable pay influence
Looking back … as we move forward 23 What could companies have done to have avoided bad governance?
The future of executive pay
Participants 25 Participant list
Participant profile
Page 1
Introduction
Corporate governance has largely evolved into a discussion of the interplay between
governments, investors, boards, and management, and how these relationships can be
best leveraged to achieve the following objectives:
1. To promote ethical corporate behaviour; and
2. To support long-term value creation for organizations.
Ultimately, good governance results in organizational effectiveness. The challenge in
achieving these objectives is striking an appropriate balance between the different -
often competing - interests of various stakeholders. Numerous corporate governance
practices, codes and legislation have been developed over the years to address
individual stakeholder interests.
It is clear that the Canadian corporate governance landscape has undergone
significant reform during the past several years and will continue to remain a focal
point for all involved stakeholders in the years to come. Ongoing disclosure
enhancements and regulatory reforms have come about to bolster investor confidence
following several renowned corporate failures, such as the fallout of Enron and
Nortel. New codes and legislation have also been introduced as a result of U.S.-led
governance initiatives, such as the Sarbanes-Oxley and the Dodd-Frank Consumer
Protection Act. For better or for worse, the Canadian corporate governance model is
in a constant state of evolution.
With these ongoing changes in the Canadian governance model, much of the debate
focused on whether the new codes and legislation have effectively supported or
detracted from achieving the corporate governance objectives. Can ethical behaviour
be legislated? Can value creation be supported by rules and guidelines? If corporate
governance codes and legislation do not provide a sufficient platform to achieve
these objectives, then what should organizations do, or consider doing, to promote
ethical stewardship and create shareholder value?
In light of the perceived egregious pay packages and their association with ethical
scandals, executive compensation has been viewed as one of the key internal control
mechanisms for organizations that help to promote and reinforce good governance.
What is the role of executive compensation in promoting and reinforcing sound
governance practices? What are the primary levers of executive compensation that
help accomplish the corporate governance objectives?
Page 2
Our approach
To examine the relationship between the dynamic corporate governance landscape
and executive pay, Hay Group interviewed 24 Canadian organizations that represent
various industries, such as banking, consumer staples, energy, materials, IT and
telecommunication services, among others. The participant list and profiles can be
found at the end of the report.
The remainder of this report outlines the views shared by the survey respondents, as
well as key findings and observations that may provide greater context on how the
current and future corporate governance landscape can influence the design of
executive pay going forward.
Page 3
Executive summary
The Canadian corporate governance movement
Compliance and value creation
The role of executive pay
Looking back … as we move forward
Impressions were mixed regarding the effectiveness of the governance movement in
Canada. Respondents shared their top three corporate governance challenges:
determining the right amount of information for disclosure, implementing processes to
cater to constantly changing regulatory requirements, and building effective Boards.
Respondents believed that Boards establish the “tone at the top” and, as such, they are
responsible for addressing these challenges and promoting sound governance practices
within their organizations. Organizations are strengthening stakeholder engagement
efforts as a means to measure satisfaction with their existing governance structure and
compensation programs. Stakeholder engagement levels are on the rise, particularly
with investors and proxy advisors.
In hindsight, respondents expressed that the key pillars for a sound corporate
governance process is comprised of:
Alignment between performance, risk and compensation design
Adequate monitoring through implementation of the corporate governance
practices like appropriate executive compensation design
Having an effective Board.
The future of governance and executive pay, as expressed by the respondents, revolve
around the following themes:
Engage and be engaged;
Focus on the top; and
Simple is best.
Generally, respondents expressed that their current executive compensation programs
provide strong pay and performance linkage. Market compensation practices and
executive contribution to the success of the company were cited as the key factors
impacting the design and quantum of executive pay packages. While investor views
and public opinion do not currently carry significant weight in determining executive
pay, it is expected that such factors may become more powerful executive pay drivers
in the future.. Respondents shared that their executives respond well to their variable
pay, which was found to be one of the key factors impacting the attraction and
motivation of executives.
Much of the focus on corporate governance in Canada has been placed on compliance.
However, governance best practices may not be broadly applicable to all. Respondents
have expressed that the Chair and the CEO are accountable for maintaining and
communicating the long-term view for the organization, and in effect, promote
sustainable value creation for the organization. It was acknowledged that supporting
organizational growth may involve a certain degree of risk-taking. While codes and
legislation have been introduced to deter excessive risk-taking behaviour, corporate
governance is not expected to significantly reduce risk-taking, but will shape the
framework and discipline for risk management going forward. Ultimately, there is
agreement that ongoing good governance is a matter of culture, not regulation.
Page 4
The Canadian Corporate Governance Movement
1
Page 5
Current attitudes and future expectations
The Canadian corporate governance landscape is
continuously evolving. Organizations, and in particular
boards and management, are held accountable for
responding to emerging trends and practices, where
appropriate. When asked about the practical impact of recent
corporate governance regulations, responses were mixed.
The majority of respondents believe that the Canadian
corporate governance movement is taking steps in the right
direction. Conversely, approximately one-third of the
respondents also expressed that the current movement has
been less than ideal.
The corporate governance movement has been constructive For those who shared positive views regarding the direction that governance developments
are following, one common appreciation was for the principles-based approach under the
Canadian governance model. This approach is seen to be less restrictive than the prescriptive
nature of the US governance model. Respondents expressed that the heightened awareness on
corporate governance issues at the board and management level has drawn focus on areas
such as risk management, pay for performance, and pay structure. Now, there is broader
recognition for greater due diligence efforts when designing and evaluating executive
compensation programs. This involves keeping pace with governance developments and
broader market practices. By extension, this also entails carefully examining the
appropriateness of adapting to emerging trends as it relates to the business strategy, the
compensation philosophy, and stakeholder interests. Finally, respondents have shared the
view that disclosure quality and consistency have improved over time with the continuous
reform of the corporate governance codes and legislation.
Perspectives at a glance:
Positive. The corporate governance codes and legislation raise some good
questions that the board should be asking … forces everyone to re-evaluate what
they are doing and whether or not it is the right thing.
Mainly positive. The ISS and CCGG help to keep us honest. All of the new
regulations are made with good intent. However, you can’t legislate good
behaviour. We are happy that the regulations in Canada are principle-
based and not rule-based as in the US.
33%
24%
43%
Negative Neutral Positive
Page 6
Current attitudes and future expectations
Corporate governance movement has not been ideal Those who expressed less optimistic opinions in the current governance movement share the
view that there has been a general pressure to conform in an effort to secure a “yes” vote
from institutional investors and proxy advisors, despite the Canadian governance model being
less prescriptive by nature. Some have raised the concern that this “pressure” may in effect
diminish the board’s autonomy to make objective decisions because the pressure to comply
has resulted in a lack of clarity with regards to disclosure expectations. The belief is that
emerging disclosure requirements may not be broadly applicable and/or considered material
by all. Furthermore, many respondents feel that the amount of time and resources required to
fully comply with increasingly stringent reporting requirements may not directly correlate
with quantifiable benefits for the organization or enhance disclosure quality.
Perspectives at a glance:
Corporate governance doesn’t help companies understand their risks. Intense
chatter is scaring management off risk. There is so much fear around being sued.
A lot of corporate governance is “check the box” factors. Companies now
waste time worrying about governance instead of focusing on business
and strategy.
Negative. The board and management have to do a lot more work and
analysis that isn’t focused on return on investment. Whenever they are
making decisions they have to consider whether it will be seen as negative by the
ISS. You are now forced to do more think and analysis than before.
Page 7
Key corporate governance issues
In the push for good governance, compliance with emerging best practices has become an
increasingly important consideration for many organizations. While some feel that there is a
pressure to comply, others regard compliance with best practices as demonstration of good
stewardship. Irrespective of the position that they maintain on the current governance
movement, few were able to pinpoint one key corporate governance issue when asked to
comment on the challenges that their organizations are currently facing.
Below we highlight the top three corporate governance issues that were most commonly cited
by survey respondents:
Determining the right amount of disclosure Organizations tend to rely on their annual disclosed documents as their primary point of
contact with stakeholders. As such, determining the quantity and the content of disclosure is
one of the most significant corporate governance issues that survey respondents are currently
facing. The dilemma relates, in part, to the costs involved and the potential benefits that may
be derived from ensuring compliance. Some hold the view that the amount of time and
resources required to maintain compliance may not produce tangible benefits for the
organization. As such, it is difficult to determine an appropriate amount of disclosure.
Another aspect of the challenge is that many organizations adopt a “wait and see” strategy
with regards to compliance – there is no motivation to comply when others have yet to adopt.
Generally speaking, organizations would like to disclose information that will provide the
right information to stakeholders, but only to the extent that is necessary to remain market
competitive. Organizations typically do not disclose any more than that unprompted.
Over 30%
of respondents
highlighted that
determining the
right amount of
disclosure
remains as the most
significant corporate
governance issue.
Page 8
Key corporate governance issues
Dynamic regulation compliance With the ever changing corporate governance landscape, keeping pace with the constantly
evolving business and regulatory requirements has proven to be difficult for the majority of
organizations. A good deal of time and energy is spent understanding the disclosure
requirements and evaluating the suitability of adapting to emerging best practices as they
relate to the organizational strategy. While some continue to maintain “wait and see”
strategies with regards to adoption, the push for increased transparency and communication
with stakeholders has in effect created pressure to conform. Some have expressed that
maintaining compliance is drawing resources away from managing other aspects of the
business.
Building effective boards Ensuring that there are independent, competent, and well informed directors on the board was
cited by respondents as the next most common corporate governance issue faced by
organizations. Related to board composition are issues such as board succession, board
education, and board diversity, which all speak to the importance of having the right people
and improving overall board effectiveness. The board is critical in guiding the company to
where it needs to go and to drive strategy in order to create shareholder value.
Perspectives at a glance:
We want to accommodate information required by shareholder and advocacy groups,
but how much information should be disclosed? Disclosures have a tendency
to send out incorrect messages, such as the perception of high executive pay.
A few bad apples have created a bad image, leading to red tape. So, we
have to disclose right to the point.
Where there is a lot of governance regulation, it makes you look everything over a
couple of times. You can become more focused on what the ISS or Glass
Lewis would think than on what is the best decision.
Our board is constantly pressuring us to make the system less unique. Eventually, I
believe that corporate governance rules will cause all executive
compensation systems to look exactly the same.
Page 9
Who determines good and bad corporate governance?
Stakeholders such as the government, regulators, investors, boards, management, and media
all play a role in shaping acceptable governance systems and practices. Ideally with multiple
and competing stakeholders, each one should have equal input in determining what
constitutes good and bad governance. However, the common view shared by the majority of
survey respondents is that internal stakeholders (i.e. board and management) are more
directly involved in operational issues, and as such, are better positioned to: (1) determine
what constitutes good governance and (2) comply with and promote sound governance
standards.
There was some acknowledgment that external stakeholders (i.e. investors, the government,
and regulatory bodies such as the Financial Stability Board and OSFI) are also well-
positioned to determine what constitutes good governance. However, some respondents
raised the concern that the approach to corporate governance undertaken by external
stakeholders may in fact be too generic to be broadly applicable for all organizations.
Over 70% of respondents have
expressed that companies
(the board) are most accountable for good and
bad corporate governance.
Page 10
Stakeholder engagement
Sound corporate governance systems rely on active stakeholder engagement processes, which
involve initiating open, two-way dialogue that seeks understanding and resolutions to issues
of mutual concern. With the competing interests that come with various stakeholders,
engagement strategies help to balance the divergence in opinions, and in turn, help to
facilitate decision-making and improve accountability for stronger governance.
Which of the stakeholders are most involved in the engagement process? Nearly all
respondents revealed that the Chair of the Board and/or the CEO typically interacts with
investors, regulators, and legislators on behalf of their organizations to address issues related
to executive pay. Externally, respondents revealed that they communicate most frequently
with investors and proxy advisors about executive pay. Investors in particular have benefited
from increased levels of engagement with organizations due to the shareholder activism
movement that has gained momentum in Canada.
Over 50% indicate The Board Chair and CEO
are primarily accountable for addressing issues
and/or inquiries concerning executive pay.
Page 11
Stakeholder engagement
Overall, respondents have expressed that they have developed and maintained positive
relationships with the government, regulatory organizations and investors over time. Issues
and/or inquiries regarding executive pay are typically brought forward by investors and proxy
advisors. With the exception of a few companies in the financial services industry, the
majority of respondents said that they do not engage in dialogue with legislators and
regulators.
Respondents also felt that the strength of relationships maintained is not consistent with each
of the various stakeholders. The differences in stakeholder interests require organizations to
engage in constructive and separate dialogues with each stakeholder. Ultimately, there is a
shared responsibility among the stakeholders to develop and share insights on issues of
mutual concern. While it is difficult to fully satisfy all stakeholders, ensuring that they are
positively engaged in the decision-making process will promote their buy-in, which is an
important consideration in the wake of shareholder democracy.
Issues and/or inquiries regarding
executive pay are typically brought
forward by investors and proxy
advisors.
Page 12
The influence of proxy advisors on corporate governance
As previously noted, proxy advisors such as the Institutional Shareholder Services (ISS) and
Glass Lewis actively engage with companies on issues relating to governance and executive
pay. The majority of respondents expressed that they occasionally interact with proxy
advisors, with interaction generally taking place only when annual voting recommendations
are released by the proxy advisors. For others who are more proactive with their stakeholder
engagement strategies, interaction with proxy advisors occurs on a more regular basis.
Proxy advisors have a positive role in corporate governance The majority of respondents have maintained positive relationships with proxy advisors. In
fact, proxy advisors have become good “watch out tools” for some organizations because
they help to solicit stakeholder views and raise awareness about relevant issues.
Characterized by some as being “open and collaborative”, proxy advisors have become a
critical component of stakeholder engagement strategies. Some respondents also shared the
view that proxy advisors have been helpful in promoting consistency in disclosure, which has
contributed to greater transparency and improved decision-making processes.
Proxy advisors are not effective in the context of corporate governance Other respondents shared the belief is that proxy advisors do not fully evaluate the facts and
circumstances of each organization with respect to voting matters. They are seen to
encourage a “one size fits all” or “check the box” methodology when developing their voting
recommendations. There is little transparency as to how decisions are reached and how their
recommendations are supported. This generic approach is perceived to be limited in its
applicability. Some also expressed that proxy advisors are not perceived to be fully
independent because they simultaneously represent the interests of organizations and
investors through their multiple service lines. They are seen to have potential conflicts of
interest that diminish the credibility of their recommendations.
Perspectives at a glance:
They review disclosure documents; however, they don’t understand the business at
all. We believe that the proxy advisors are too busy to actually read the
documents and they just create more work.
They play a role in helping people get a view and provide perspective.
However, they do not have a full picture of the organization and cannot understand
why certain decisions are made. They lack information, which creates issues
with interpretation.
Page 13
The influence of proxy advisors on corporate governance
Proxy advisors are a necessary evil Those who maintained a more neutral position shared the belief that proxy advisors are a
necessary evil because they represent an important communication channel between investors
and organizations, regardless of their overall effectiveness.
How much power do they really have? Respondents expressed different levels of support for the impact that proxy advisors have on
decisions relating to corporate governance and the design of executive pay. Given that
compliance with the recommendations put forward by proxy advisors is voluntary, some
respondents maintain the position that proxy advisors are limited in their influence. Others
believe that proxy advisors wield significant impact on investor and corporate decisions
through their voting policies and guidelines.
Regulating proxy advisors In June 2012, Canadian securities regulators launched a public forum to solicit opinions on
how to better govern the proxy advisors. Some common themes emerged based on the
feedback that the regulators have received to date:
Potential conflicts of interest;
Perceived lack of transparency;
Potential inaccuracies;
A need for corporate governance; and
An over-dependence on recommendations put forward by proxy advisors.
Of the concerns cited above, the perceived lack of transparency and the over-dependence on
their recommendations form the most common frustrations. Regulators have tentatively
proposed some actionable considerations to address these frustrations, which include possible
disclosure of methodologies and analytical models and limiting conflicts of interest through
adequate organizational structures. The regulators have expressed that they will continue to
monitor the public feedback and develop recommendations as they see fit.
Perspectives at a glance:
They review our documents and we are anxious of their inputs. They don’t have any
accountability, yet they have significant impact. Many organizations in similar
situations follow them religiously. They will interact only if they have got something
wrong.
Page 14
Compliance and Value Creation
2
Page 15
Corporate governance and risk taking
In the aftermath of the credit crisis, much of the corporate governance focus has been shifted
towards the development of pay-related regulation, codes and standards aimed at
discouraging excessive-risk taking. As expected with the multiple and competing
stakeholders that are part of the governance equation, multiple definitions of risk and risk-
taking have emerged in light of the push for greater investor protection. As with all other
matters relating to governance, it is difficult for organizations to fully cater to the different
stakeholder expectations on the role of risk in creating shareholder value.
Executive pay, and in particular incentive compensation, has been commonly associated with
the promotion and reinforcement of risk-taking behaviours. Impressions were mixed as to
whether executive pay was the most critical factor affecting executive behaviour. Corporate
culture was seen to be equally, if not more, influential on executive behaviour. There is
general agreement that proper ongoing good governance is a matter of culture and not
regulation.
Perspectives at a glance:
You have to take some risk. It is good to acknowledge the type of risk that
you are taking, the boundaries, and what is acceptable. Some are good, and
some are unnecessary.
The newest rule of “striking a balance” limits the risk that executives
might get in terms of personal gain. However, it does allow for a reasonable
amount of risk through the design of incentive plans.
Corporate governance is not the driver for risk-taking, it’s the business
strategy. It’s not just the rule, it’s the practice.
Page 16
The role of corporate culture
Some respondents expressed that it is ultimately the board’s responsibility to provide
effective risk oversight for the organization, not regulators. The board directly influences the
organization’s approach to risk-taking by setting the “tone at the top”, which is a function of
the business model, the strategic priorities, and the corporate culture. The emergence of
corporate governance codes designed to help deter unnecessary risk-taking behaviour is
simply an additional set of considerations that the board may wish to adopt where
appropriate; they should not fundamentally change the way in which business is run within
the organization. Ultimately, ensuring that there are adequate internal controls built into the
organizational structure and/or processes is regarded as a necessary and normal course of
business for any well-run company. As such, establishing and reinforcing acceptable levels of
risk for an organization is viewed as a critical strategic function that cannot be fully achieved
by way of mere compliance with governance best practices.
This is not to say that the corporate governance codes and legislation developed over time are
without their merits. While they are not designed to provide a prescriptive set of solutions,
respondents have expressed that the new codes and legislation have fostered the development
of a culture that is more transparent and governance-oriented within organizations. They have
guided boards and management to ask the right set of questions and to undertake a disciplined
approach when assessing their risk appetite versus risk exposure. Organizations are now more
mindful of how to balance current compensation programs in order to support decisions that
are risky, but ultimately value-enhancing for the company.
Perspectives at a glance:
Decisions involving taking too much risk or not are very board-driven.
Such decisions also depend on the industry.
Good corporate governance does not stop companies from taking too much risk. It
involves top down trust issues. It is more an issue to deal with culture
than corporate governance.
Risk management is a new area. It makes them aware. Now, they do analysis each
year on risk taking and it is likely a positive change.
Page 17
Fostering sustainability
One of the key issues driving the changes to corporate governance following the series of
corporate scandals during the credit crisis was a desire to ensure that companies are held
more accountable for the long-term sustainability of their organizations. Respondents
expressed strong opinions that guarding the long-term view for the organization is ultimately
the responsibility of the board and management. However, one concern was raised that they
are often so entrenched in the long-term view that they lose focus on what matters in the
context of the current climate. Sustainable value creation relies on boards and management to
remain in sync with the current market when establishing their longer term strategic
priorities.
While investors tend to have short/medium-term views in most cases, some expressed that
they also have accountability to maintain focus on sustainability, rather than short-term
growth. This view was not common among the survey respondents. However, in light of the
rise of shareholder activism in Canada, investors now have greater power to hold the board
and management accountable by reinforcing the importance of long-term sustainable value
creation.
What is long-term success? On the issue of long-term sustainability, it is important for stakeholders to have clarity in
what the long-term objectives are for the organization and for boards and management to
have an understanding of how to best motivate the achievement of such objectives.
Long-term success can be defined in many ways, such as financial strength, strategic
alignment, and operational effectiveness. The majority of respondents resonated with
financial strength, and in particular growth through maximizing shareholder return, as the
fundamental long-term goal. Strategically, organizational growth and diversification was
cited as a top priority for many respondents. Operationally, delivering on commitments to
employees, customers, and the environment were among some goals shared by the
respondents.
A clear understanding and communication of what long-term success means to an
organization can provide greater insight into how to best align pay with long-term
performance.
Page 18
The Role of Executive Pay
3
Page 19
Incentive linkage
With the spotlight on pay and performance, investors are looking for incentive plans that
better emphasize a long-term interest in the company, both through continued ownership and
longer-term performance requirements. When respondents were asked to comment on
whether their organizations’ incentives were linked to the right performance targets, nearly all
expressed that their incentives are well-aligned. This belief is supported by the fact that a
significant amount of time and effort is spent on ensuring that compensation programs are
adequately designed, as well as the mechanisms that are in place to provide instantaneous
market feedback when incentive plans are out of alignment. Market indicators such as share
price and shareholder proposals help to convey the public’s overall level of comfort with the
organization’s compensation programs.
Some respondents expressed that although the linkage exists, there are complex and
redundant performance metrics which may or may not align with the business strategy. As a
next step, organizations will be working towards a simpler compensation design in an effort
to improve the executives’ line of sight between performance targets and their contribution to
company success.
Perspectives at a glance:
Yes. A lot of extensive work is done to get the compensation right.
We believe that our executives respond very well to the incentives they have.
Yes. It is a bit of a struggle in the short-term. It can sometimes be difficult to
draw a perfect correlation between pay and performance. We get a lot of
market feedback on what we should be doing.
Yes in general - design issue in some elements. We use a lot of metrics. We
are trying not to over-complicate the metrics and targets.
Page 20
Drivers of executive pay
Challenges surrounding executive pay typically revolve around the question of “what are the
main drivers behind design and quantum of compensation arrangements?”.
For the majority of respondents, broader market practices and corporate/individual
performance considerations predominantly influence the design and quantum of executive
pay. Interestingly, broader market practices are more commonly considered among
S&P/TSX60 respondents, whereas performance considerations carry more weight in the
decisions for non-S&P/TSX60 respondents.
While corporate governance codes, legislation, and investor views are considered when
designing executive compensation packages, the survey results suggest that these factors are
not primary points of consideration for Canadian organizations.
2012 marks the second year since Say on Pay was introduced in Canada, and investors are
becoming increasingly vocal with their power to express their discomfort with executive pay
levels. To date, 84 Canadian issuers have voluntarily adopted Say on Pay, and it is expected
that investor views and public opinion may become more powerful drivers of executive pay
going forward.
Perspectives at a glance:
Factors considered are specific goals to be achieved, market
compensation levels and mix among our peers, and supply of key talent.
Government legislation and corporate governance codes are considered after the
fact.
Compliance with
market best practices
and performance
predominantly influence
the design and quantum of
executive pay
Page 21
Justifications for executive pay
The overall concern that executives are excessively compensated continues to be a focal
point for many stakeholders.
The majority of survey respondents maintained that the compensation they offer to their
executives are adequately justified by achievement of performance objectives, as well as
how much the market pays for similar positions. This view aligns with what organizations
have deemed as the primary drivers of executive compensation.
The mobility of the position, criticality of the role and internal equity were among some of
the other justifications for executive compensation levels. However, there was
acknowledgement that these factors are typically considered for non-executive positions
only.
Perspectives at a glance:
More pay drives behaviour and risk taking.
At the executive level, pay is not an important driving factor. If they feel they are
not being paid properly, they will just leave the organization. The need to win
and the need to perform are what actually drive performance and
behaviour.
Market pay levels
and achievement
of performance
objectives
are the top reasons
used to justify
executive pay
Page 22
The variable pay influence
Variable pay is seen by companies as being strongly linked to their ability to attract and
motivate executives and to provide clarity around the organization’s operating strategy.
While respondents expressed that variable pay often helps to promote retention, retention
needs may not always be achieved by way of offering additional incentive pay.
The majority of respondents feel that there is a strong linkage between pay and performance.
Approximately one-third of the respondents believe that pay can directly encourage risk-
taking and impact behaviour.
With the rise of shareholder activism in Canada, boards and compensation committees are
taking into consideration some of the common concerns that have been raised by shareholders
when designing compensation packages. The focus has shifted to pay packages that really do
link to long-term sustainable value creation.
Perspectives at a glance:
The nature or size of the rewards package should not influence performance or
motivation – it should be congruent, reflect and reinforce the strategic
direction but it is not a reason to perform.
At the executive level, pay is not an important driving factor. If they feel they are not
being paid properly they will just leave the organization. The need to win and
need to perform are what actually drive performance and behaviour.
Page 23
Looking Back … as We Move Forward
4
Page 24
What could companies have done to have avoided bad governance?
Respondents were asked to comment on what organizations could have done in hindsight to
have avoided bad corporate governance. Some common themes emerged:
Getting the right board The majority of respondents shared the belief that good governance starts from the top.
Respondents expressed that the board is in charge of developing corporate governance
policies. However, the effectiveness of boards has been criticized, which has called for more
attention to be paid to board composition, director competence and the responsibility to
represent broader interests. Such factors are seen to be largely responsible for fostering a
culture of successful governance.
Alignment between performance, risk, and compensation design A number of respondents indicated that bad corporate governance, and in particular
governance as it relates to executive pay, is an outcome of incentive plans and performance
metrics that are misaligned with the long-term corporate strategy. Going forward, incentive
plans should focus on performance; linkage with the right performance indicators will drive
the desired strategic outcomes.
Enhanced quality of disclosure The majority of the companies were in favour of having some disclosure of executive pay.
However, additional disclosure than what is presently required was not favourable among
respondents as a deterrent against bad corporate governance. Respondents expressed that an
improved quality of disclosure (i.e. through a more effective and transparent reporting
structure) is more important than the quantity of disclosure.
Perspectives at a glance:
For successful corporate governance, the board needs to strive and populate segments
with proper culture. Set the tone and reinforce.
Get the right directors in place and everything else follows. Thus,
succession planning is vital. If you have a deep talent pool and strong succession
planning, then you will not have as many issues with executive pay.
To avoid bad corporate governance, companies should align pay to performance and
the compensation design should take into consideration the underlying risks in the
company’s performance.
There has to be a fine balance between the type of reporting/detail and the amount
of reporting/detail.
Page 25
The future of governance and executive pay
Corporate governance will always need to evolve with changes in the corporate landscape,
rules, as well as the environment. The continued use of a cookie cutter approach to
governance will not be helpful in strengthening organizational effectiveness, especially when
the current governance model has been focused too heavily on compliance rather than value
creation. Some common themes emerged as respondents were asked to comment on their
expectations for the future of governance and executive pay:
Engage and be engaged Based on the responses gathered, respondents generally expect that the future of governance
will call for a more proactive approach, which will involve stronger levels of board,
management and shareholder engagement. The ultimate goal is to ensure that all stakeholders
are held to greater accountability for the decisions they make. Communication between the
various stakeholders needs to improve for corporate governance changes to be truly effective.
Focus on the top As outlined in the previous section, respondents shared a common belief that good
governance starts from the top. Given the constantly evolving governance landscape in
Canada, “rubber stamp” boards need to be replaced by ones that are more empowered and
informed to make the correct decisions. Board diversity, board composition, and board
education are all important considerations going forward.
Simple is best Irrefutably, there has been a flurry of corporate governance codes, legislation, and regulations
in the aftermath of the credit crunch, as governments and markets seek to reduce the risk of
future corporate and market failures. While some respondents have shared positive views on
the overall corporate governance movement, there are concerns that the regulatory approach
is becoming too intrusive and detailed. The future of executive pay design and disclosure will
move towards simplicity – simpler incentive plans that provide for more transparent
disclosure, and higher quality disclosure that conveys pertinent information in a simple and
concise manner.
Page 26
Participants 5
Page 27
Participant list
Participant name Industry category
Organization
type
S&P/
TSX60
Aecon Group Inc. Industrials Company No
Arc Resources Ltd. Energy Company Yes
BMO Financial Group Banking Company Yes
Canadian Oil Sands Ltd. Energy Company Yes
Centerra Gold Inc. Materials Company No
Cineplex Entertainment LP Consumer Discretionary Company No
Cott Corporation Consumer Staples Company No
Echelon General Insurance Company Financials Company No
Finning International Inc. Industrials Company No
Fortis Inc. Utilities Company Yes
Healthcare Of Ontario Pension Plan
(HOOPP) Pension Fund Pension Fund No
Magna International Consumer Discretionary Company Yes
Methanex Corporation Materials Company No
Ontario Securities Commission Regulator Regulator No
Pengrowth Energy Corporation Energy Company No
RBC Banking Company Yes
Rogers Communications Inc. Telecommunication Services Company Yes
Scotiabank Banking Company Yes
Softchoice Corporation Information Technology Company No
Talisman Energy Inc. Energy Company Yes
TD Bank Financial Group Banking Company Yes
Tim Hortons Inc. Consumer Discretionary Company No
Toromont Industries Ltd. Industrials Company No
Viterra Inc. Consumer Staples Company No
Page 28
Participant profile
Page 29