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© 2014 Hay Group Limited. All rights reserved. www.haygroup.com/ca

2014 Corporate Governance Best Practices Report

In collaboration with the

Canadian Society of Corporate Secretaries

www.haygroup.com/ca

Table of Contents

EXECUTIVE SUMMARY............................................................................................. 1

Corporate governance overview ....................................................................................................................... 1

Sustainability, ethics & environmental governance .......................................................................................... 1

Use of technology in implementing governance ............................................................................................... 1

Effective Board operation & governance maximization processes .................................................................... 1

Stakeholder engagement .................................................................................................................................. 1

Boardroom diversity ......................................................................................................................................... 1

Risk management ............................................................................................................................................. 1

Executive pay .................................................................................................................................................... 1

LOOKING AHEAD – THE FUTURE OF CORPORATE GOVERNANCE ................... 2

INTRODUCTION ......................................................................................................... 3

The Canadian Society of Corporate Secretaries (CSCS) ...................................................................................... 3

Hay Group......................................................................................................................................................... 3

Corporate Governance ...................................................................................................................................... 3

OUR APPROACH ....................................................................................................... 4

Methodology .................................................................................................................................................... 4

Participant profile ............................................................................................................................................. 5

CORPORATE GOVERNANCE OVERVIEW............................................................... 7

Risk management and oversight ....................................................................................................................... 8

Corporate governance legislation ..................................................................................................................... 9

Top Board matters .......................................................................................................................................... 10

Regulatory compliance ................................................................................................................................... 11

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SUSTAINABILITY, ETHICS & ENVIRONMENTAL GOVERNANCE ....................... 12

CSR ................................................................................................................................................................. 12

Environment ................................................................................................................................................... 14

Ethics .............................................................................................................................................................. 15

Environmental/ethical shortcomings .............................................................................................................. 16

USE OF TECHNOLOGY IN IMPLEMENTING GOVERNANCE ............................... 17

Advancements in technology .......................................................................................................................... 17

Board support & communication .................................................................................................................... 18

Board meetings ............................................................................................................................................... 19

Documentation management ......................................................................................................................... 19

EFFECTIVE BOARD OPERATION & GOVERNANCE MAXIMIZATION PROCESSES ............................................................................................................ 20

Board performance ......................................................................................................................................... 20

Director education and assessment ................................................................................................................ 21

New directors ................................................................................................................................................. 23

CEO evaluation ............................................................................................................................................... 23

CEO succession planning ................................................................................................................................. 24

Mission critical staffing ................................................................................................................................... 25

Role of the corporate secretary ...................................................................................................................... 26

What makes an appropriate Board? ............................................................................................................... 27

STAKEHOLDER ENGAGEMENT ............................................................................ 28

Stakeholder communication ........................................................................................................................... 28

Engaging with stakeholders ............................................................................................................................ 30

BOARDROOM DIVERSITY ...................................................................................... 31

Overall diversity.............................................................................................................................................. 31

Facts & figures within the Canadian Boardroom ............................................................................................. 33

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Recruitment of Board members ...................................................................................................................... 34

Hurdles to greater Boardroom diversity ......................................................................................................... 35

RISK MANAGEMENT & EXECUTIVE PAY .............................................................. 36

Risk management ........................................................................................................................................... 36

Executive pay .................................................................................................................................................. 37

Performance incentives .................................................................................................................................. 39

1 www.haygroup.com/ca

Executive summary

This report details the prevalence of corporate governance views and practices among organizations in

Canada.

Corporate governance overview

Through they are time consuming, Canadian organizations view corporate governance rules and legislation

as having had a positive impact. The guidelines provide organizational clarity on shareholder information

needs and creates a common benchmark. Overall, risk management continues to be top of mind for

Canadian Boards.

Sustainability, ethics & environmental governance

Organizations in Canada are actively engaging employees in various environmental and sustainability

initiatives and working towards reducing their carbon footprint. As well, they are taking proactive measures

to reduce unethical behaviour through training, whistleblower policies and some are linking CSR metrics

to their executive incentive plans.

Use of technology in implementing governance

Several technological initiatives are being implemented to enhance the Board’s operations through

technology. Many organizations are using web-based governance and compliance materials for training,

reporting and tracking initiatives. Most organizations are distributing material to Board members 5-10 days

in advance of meetings through secure internal portal or email systems.

Effective Board operation & governance maximization processes

Most Canadian organizations surveyed have a formal process for evaluating Boards and their CEO. They

are focused on training and education for onboarding new directors as well as continuing education though

training at Board meetings and attending external education programs. Generally, they are confident in

their ability to recruit and retain talent at the management and Board level.

Stakeholder engagement

Stakeholder communication is still the mandate of the CEO but at some organizations there is a trend to

appoint an Investor Relations Officer (IRO) for this purpose. Boards are also taking on more responsibility

for stakeholder communication and we have noted an increase in the frequency Boards communicate with

various stakeholder groups. Rightly so, stakeholder opinions continue to influence Boardroom decisions.

Boardroom diversity

A focus on diversity is growing at Canadian organizations. We have noted more organizations

implementing formal diversity policies and Board recruitment policies. Their objective is to broaden their

pool of candidates by gender, geography and skill. Many view diversity as a form of competitive advantage.

Risk management

Many organizations have implemented formal enterprise risk management policies and appointed a Chief

Risk Officer. Risk continues to be incorporated into the pay packages for executives.

Executive pay

Performance and market practices are the two most prominent factors affecting executive pay design, while

external compensation consultants continue to have a large input over executive pay packages.

2 www.haygroup.com\ca

Looking ahead – the future of corporate governance

We asked survey participants what changes they expect to

see with regard to corporate governance best practices for

2015. The most prevalent responses are:

Boardroom diversity was the top trend in future

corporate governance. The Ontario Securities

Commission has created a ‘comply or explain’

policy for increasing diversity in the Board and the

executive management team. There is a perception

that organizations need to recruit candidates that

can add different perspectives to the Board. Many

also feel that the prevalence of director term limits

will increase over the next year

Risk management has stood out as one of the major

focus areas for the Board. Many organizations have

implemented formal policies for risk management

and oversight with continuous monitoring,

updating and scrutiny of these risks

Many organizations believe the amount of

disclosure, regulation and reporting is going to

increase. For example, reporting on diversity, risk,

financials and compensation. With an increase in

reporting, many organizations expect further clarity from regulators and corporate governance

commentators on new rules and regulations

Executive compensation is also a major concern for most organizations due to increasing

shareholder scrutiny and trends such as Say on Pay. Boards are expecting to spend more time

reviewing their executive pay policies

Organizations will continue to focus on director training and education. The number of training

programs made available to directors is expected to increase with a focus on increasing education

to improve organization performance

***

Top 5 most voted corporate

governance trends for 2015:

Board diversity

Focus on risk management

Increased regulation and additional

reporting

Board and executive compensation

Director training and education


Introduction

The Corporate Governance Best Practices Report is an annual report reflecting the trends of corporate

governance in Canada. This year, Hay Group, along with the Canadian Society of Corporate Secretaries

(CSCS) conducted surveys and interviews with corporate secretaries and other governance professionals at

over 110 organizations across the country. This report highlights the key findings of our research, outlines

the views shared by survey respondents and provides greater context on the current corporate governance

landscape in Canada.

The Canadian Society of Corporate Secretaries (CSCS)

The CSCS is a leading resource for Corporate Secretaries and Corporate Governance professionals. It is

recognized as being the most important professional organization for good corporate governance in Canada.

Aside from striving to enhance the visibility and credibility of the office of the corporate secretary, it also

offers a unified voice and proven tools for best practices in corporate governance.

Hay Group

Hay Group is a global management consulting firm that works with leaders to transform strategy into

reality. We develop talent, organize people to be more effective and motivate them to perform at their best.

As organizations strive to attract and retain top talent in the face of increased public and shareholder

scrutiny, executive pay, succession, performance and competence are vital. Hay Group's consultants work

with boards as well as senior management across the sectors, from large global players to not-for-profit,

helping them address these issues.

Corporate Governance

Corporate governance has become a more pressing issue for Canadian organizations. Shareholders are

calling for increased disclosure and regulatory reform for more Board transparency.

Boardroom and executive diversity continue to be topical issues for corporate governance. For example,

the Ontario Securities Commission (OSC) proposed rule amendments’ regarding disclosure of women on

Boards and in senior management positions. The proposed amendments would require organizations listed

on the TSX to disclose the following items:

Director term limits;

Policies regarding the representation of women on the Board;

The Board’s or nominating committee’s consideration of the representation of women in the

director identification and selection process;

The issuer’s consideration of the representation of women in executive officer positions when

making executive officer appointments;

Targets regarding the representation of women on the Board and in executive officer positions;

and

The number of women on the Board and in executive officer positions1.

1 Ontario Securities Commission. (2014, January 14). News and Events. Retrieved February 2014, from Ontario Securities

Commission: http://www.osc.gov.on.ca/en/NewsEvents_nr_20140116_osc-amd-wob.htm


Our Approach

Hay Group, in conjunction with the CSCS, conducted the 2014 Corporate Governance Practices Survey

(Appendix A) which included over 110 respondents from organizations of varying sizes, industries and

structures. We sought perspectives on the following topics:

Corporate governance generally





Boardroom diversity

Risk management & executive pay

The results from these areas have been summarized and presented in this report. Additionally, these results

were also used for the purpose of identifying nominations by category for the Annual CSCS Excellence in

Governance awards. The categories for these awards are similar to those conducted via the online survey

described above and include:

Best overall corporate governance

Best sustainability, ethics & environmental governance

Best use of technology in governance, risk and compliance

Best approach to Board and committee support

Best shareholder or stakeholder engagement by a governance team

Best approach to Board diversity

Best approach to strategic planning, oversight and value creation by a governance team

CSCS used the compiled results of the survey as one of the sources of reference in determining the nominees

for these awards.

Methodology

Several question formats are used in the survey, including multiple choice and rating options in order of

preference. For questions where multiple options could be selected, each option was weighted based on

the number of times it was selected by a respondent. For those questions that asked the respondent to rate

options in order of preference, the options were weighted based on the rating and frequency. ‘Non-

applicable’ responses were not featured into the analysis.

Hay Group also conducted detailed interviews with the corporate secretaries (or equivalent positions) of all

organizations that were nominated under each of the categories of the CSCS Excellence in Governance

awards. These nominees span a variety of industries including the financial, oil & gas and not-for-profit

sectors, among others. Information and anonymous quotes from respondents were collected during these

interviews and were used to add further insight to various sections of this report.


Participant profile

The respondents spanned a range of 22 industries in total, with the majority of responses coming from the

financial services, mining, professional services and the broader public sector.


In terms of ownership structure, the highest percentage of organizations were publicly traded and not-for-

profit organizations.


Corporate governance overview

In this section, we examine the impact of corporate governance as a whole on organizations. The topics

raised include risk management and oversight, corporate governance legislation, formal policies, and

reporting procedures.

Risk Management and oversight features as one of the most prominent corporate governance issues.

Other pressing issues include dynamic regulatory compliance, Board diversity and the amount of

disclosure.


Risk management and oversight

The most prevalent issue for Canadian Boards year over year when examining the 2013 and 2014 Best

Practice in Corporate Governance survey responses continues to be ‘risk management and oversight.’ Many

organizations strive to overcome this challenge by putting in place effective risk management systems to

mitigate underlying risks.

Our interviews with the nominees of this category for the CSCS ‘Excellence in Governance awards’ have

helped us obtain insight on common trends that could be termed ‘best practice’ measures to deal with this

issue. These include:

Risk registry: Several of the Excellence in Governance award nominees’ have a risk registry to

track and monitor organizational risks. Risk registries are seen as a “living document” that is

constantly monitored and updated to include all possible risks facing the organization.

Management and the Board provide input into the registry and detailed plans are put into place to

monitor, manage and mitigate risk.

Reporting of risks to appropriate committees: Risk reporting is typically on the agenda at each

Board meeting and includes apportioning risks to different committees of the Board. Typically, the

Risk Committee, Audit Committee or Governance Committee will be responsible for risk

oversight.

Corporate risk profiles: This includes knowing your risks and categorizing the type of risk you

are willing to accept. Many of the nominated organizations regularly review their risk appetite.

Board and management work together to determine the amount of risk that is appropriate and

develop high and low risk strategies for the organization. Typically, no one person should be able

to benefit from taking excessive risk through the compensation system.


Corporate governance legislation

Most organizations are of the opinion that corporate governance codes and legislation have had a positive

impact on Board operations. This is slightly more positive than responses from our 2013 survey.

We asked nominees of the Excellence in Governance awards to provide their perspectives on the benefits

and drawbacks of corporate governance legislation.

The positive impacts: o Progress towards transparency and better guidelines in overall corporate governance

o Standardization across industries by requiring everyone to disclose the same information

o Adds clarity on expectations and standards of corporate governance

o Necessary to increase accountability and shareholder understanding

o Being proactive in implementing corporate governance best practices minimizes the impact when

practices become legislative requirements. This includes the Ontario Securities Commission

(OSC) “comply or explain gender diversity guidelines” or the Secutities Exchange Commission

(SEC) “CEO to average worker pay ratio”

The negative impacts:

o Regulation limits organizations with a one-size-fits-all approach.

o The regulation can be very limiting for smaller organizations that lack the adequate/appropriate

resources

o Directors now have to understand multiple pieces of legislation and regulation (large amount of

work that continues to increase)

o It is timely and costly for management to comply

o There is no global standard. Organizations have to balance complying with Canadian legislation

but also try to comply with legislation in other countries where they operate. There are times

when the Canadian legislation conflicts with the legislation in other countries such as the U.S.

o It can be difficult to find a balance between simplifying your language in a way that shareholders

can understand and still complying from a legal perspective


Although most of the corporate governance legislation only directly impacts publicly traded organizations,

we have also seen an impact on private and broader public sector organizations:

Positive impact in terms of providing a benchmark (eg. conflict of interests or drafting Board

policies). Even though they are not subject to reporting under the Securities Act, many broader

public sector organizations are choosing to be guided by the standards and are looking to meet or

exceed them.

However, broader public sector organizations are expected to have higher accountability to the

public. As a result, more transparency of Board compensation, composition and diversity

principles, can bring on intense media scrutinty.

Voice of the Corporate Secretary

“I don’t think it’s the legislation that’s driving the changes, but rather the “quasi-legislative” third parties,

such as the ISS, Globe and Mail’s Board Games, and the CCGG. Their thought leadership and setting of

expectations is probably the most effective force in enhancing corporate governance in Canada.”

“We view regulators more as partners than people who need to be managed. They have the ability to tell

us how to make our programs better, and it can’t be done unless someone can see the big picture.”

Top Board matters

According to survey responses, the most important issues for Boards include regulatory compliance,

strategic planning and risk management.

0%

5%

10%

15%

20%

25%

30%

% o

f re

spo

nse

s

Top 3 Board matters (1 being most important)

1

2

3


Regulatory compliance

Regulatory compliance is typically in the form of written objectives, processes and reports. Many

organizations have very detailed policies to ensure regulatory compliance in terms of risk reporting,

executive compensation, and corporate social responsibility (“CSR”), among others, which are disclosed

in publicly available documents such as a risk registry, annual report or proxy circular. Some have also

implemented policies for shareholder ownership guidelines and tenure policies for the Board.



This section covers information related to Corporate Social Responsibility (CSR), sustainability initiatives,

ethical considerations and related policies implemented by organizations across various industries.

CSR

More than half of the respondents do not have a

formal CSR policy in place. Only one third of

organizations have a formal policy or are in the

process of implementing one. The nominees for the

Excellence in Governance awards define CSR as

creating “sustainable value”. Many believe that it is

about:

1) giving back to the community

2) protecting the environment

3) being a good neighbour

4) generating sustainable organizational

practices

Generally, sustainable organizational practices will include health and safety, security, human rights,

community relations, the environment, corporate citizenship, and governance impact.

In our survey, we found that most organizations participate in several employee supported initiatives.

The Excellence in Governance award nominees take CSR into account when discussing new organizational

developments including products, services or initiatives. It becomes integrated into everyday business.

Specific strategies are developed to improve their carbon footprint, ensuring business practices are green,

using renewable energy, encouraging community involvement, and employee volunteering among others.


“We manage codes of environmental and sustainability responsibilities through our code of conducts and

ethics, a safe disclosure policy, and culture of ethical business conduct. Our employee CSR culture

includes wellness, recognition for employees who perform well and a flexible working environment.”


Many organizations invest significant resources to incorporate their CSR initiatives into their overall

business strategy. Aside from the activities described above, some organizations have a department whose

primary responsibility is to focus on ethics, sustainability and CSR related work. Trends within this area

include:

Sustainability committee: Creating a sustainability committee at the Board level to review

performance on a quarterly basis

Charitable wellness programs: Integrated into the culture of the organization

IT related operations: By introducing paper-less systems, electronic transfer of information,

and/or related performance metrics such as waste per employee, etc.

Generating awareness: Ensuring every employee is aware of ethical and environmental policies

and procedures

Fostering culture for CSR: Creating a culture of ethical conduct, a safe environment and

continuous improvement for CSR

All of the Excellence in Governance award nominees include CSR-related metrics in their overall

performance measures. In terms of executive compensation, a scorecard is used to assess the results of

CSR initiatives. CSR is ingrained in the long term strategic plan and constantly monitored for success and

areas of improvement.


“The organization monitors the KPI’s on a strategic level, and we try to measure more of the work we do

because we believe ‘what gets measured gets done.”


Environment

Just over 50% of Canadian organizations surveyed have a formal environmental policy with no change year

over year. The use of an environmental policy is much greater at organizations in the Mining, Utilities and

Oil & Gas industries in which almost 80% have a policy.

Despite not having a formal policy, most organizations engage in several sustainability-related initiatives.

As demonstrated in the chart below, organizations engage in a variety of ways to protect the environment.

Only about 20% of organizations surveyed have elements of senior executives’ compensation plans tied to,

or affected by, the organization’s performance around its sustainability initiatives. For the organizations

who do, many see this as a form of competitive advantage and this is supported by the rationale that

minimized environmental damage would lead to long term economic growth.

Many organizations are taking their sustainability initiatives to new lengths in the hope of reducing their

carbon footprint and saving money in the long run by using green energy to power buildings. Some

organizations are working to ensure their buildings are certified as BOMA Best or LEED certified, and

ISO:14001 certificates for their environmental management systems.

0% 10% 20% 30% 40% 50% 60% 70% 80%

Other

Cutting emissions or pollutants

Enhancing impact on local communities

Improving environment around facilities

Improving energy efficiency

% of responses

Sustainability initiatives


Ethics

70% of the respondents have an official whistleblower policy, with the oversight of the process divided

amongst the Audit Committee, the entire Board, or the Corporate Governance/Nominating Committee. All

organizations nominated for the Excellence in Governance awards have a formal whistleblower policy and

provide their employees with training on several important issues. This training is typically tracked and

measured on a quarterly or annual basis. This tends to be the most common practice among the

organizations in our survey.

80% of the survey respondents stated that they engage in employee training and sensitization to ethical

requirements (which includes code of conduct, insider trading policies, among others). The chart below

outlines the prevalence of training topics in Canadian organizations’ ethical training programs.

Harassment and discrimination,

conflicts of interest and reporting

incidents are the most prevalent

types of ethical training. 80% of

organizations in the financial sector

train their employees on anti-money

laundering and over 50% of

financial sector organization train

their employees in securities

transactions and insider trading.


Environmental/ethical shortcomings

Most organizations have elaborated on individual shortcomings faced either on the environmental or ethical

front. However, many ethical shortcomings are being seen as opportunities to improve.

Some organizations view their office building emissions as an ethical shortcoming. Although they have

plans to raise their buildings to an acceptable standard, in some cases a long lease agreement with a building

or property manager can slow down progress. Other organizations are looking to improve their monitoring

and reporting procedures and create new ethical training programs for employees on topics such as anti-

corruption or anti-bribery.

Organizations strive for constant improvement to increase their score.


“In terms of environmental sustainability, we noticed we were not “walking the talk”. An important part

of our business is to ensure we work with our customers to help them reduce their energy consumption

and conserve energy; we realized we weren’t doing as much of that as we should.”

“At times, it can be difficult to put a number on soft targets such as community involvement and

employee volunteer programs. We must have a quantitative goal that is easier to align and show with

numbers how our goals are impactful to the organization.”



This section focuses on the most prevalent ways in which organizations use technology as a way to improve

Board operations and manage communication, risk management and documentation.

Advancements in technology

Most organizations are continuously looking

for measures to update their existing

technology. Some recently adopted trends in

this field include the use of tablets, secure

Board portals, web training programs and risk

management software.

More organizations are using technology to

reduce the environmental impact of paper

copies of meeting materials. Some

organizations have stopped printing hard

copies of meeting materials and make

materials available through a secure Board portal.

Organizations are putting some or all of their corporate information online to dramatically reduce paper

consumption. One of the Excellence in Governance nominees has a global entity management system that

has a legal entity based lens of the organization. It stores all annual corporate filings, legal licenses to

operate in different parts of the world, tracks the number of Boards that an employee sits on and monitors

the maximum number of Boards served and the compensation structure amounts for executives.

Internally, technology has been adopted in operations such as payroll, tracking deferred share units and

general record keeping to help reduce human error.

Less than half of our respondents use an IT system for the purpose of managing compliance related risks.

The publicly traded organizations feel that they are able to effectively communicate with shareholders

through technology. For example, one organization in financial services has moved to an electronic voting

platform for the proxy material which has contributed to a 9% increase in shareholder voting.


Board support & communication

Technology continues to provide ever-evolving benefits of improving cost-efficiency, accuracy and

increasing communication.

The advantages of implementing technology in the Boardroom, according to the organizations we

interviewed, are as follows:

Secure email and portals allow for easy transmission, storage, compilation and access to information

Streamlines information access so that only relevant people have access to relevant information

Meetings have become more efficient because of the advanced methods of communication via

teleconferencing, reconfigured Board meetings and higher security, enabling better informed

decision-making

Ability to track and monitor shareholder communications including complaints and questions

through emails and the corporate website

Directors use video-conferencing technology, such as Skype, to participate in Board meetings from

anywhere in the world. Unlike a teleconference, Directors are able to communicate without missing

non-verbal cues

Organizations may be apprehensive in adopting technology due to potential issues in online security. As a

result, highly secure communication and documentation is the top priority of most organizations.


“We give our directors iPads and created our own internet site so we have full control of access. If any

of the directors lose their iPads, we can wipe out the data anywhere in the world.”


Board meetings

The majority conduct Board meetings between 3 and 6 times annually, closely followed by organizations

who conduct them between 7 and 10 times annually.

Most organizations distribute materials for these meetings via internal or external Board portals, while

secure e-mail or tablet devices are also common. Board materials are typically delivered to Board members

between 5 to 10 days in advance of the meeting.

Documentation management

Two-thirds of organizations surveyed have a system in place for either documentation management or

regulatory filing.

Overall, organizations have successfully eased into the use of technology and have adopted similar

measures across industries for the purpose of communication, information access and storage. However,

with technology continuing to evolve, it will be challenging to stay on the leading edge.


“Our team keeps current on the latest capabilities; we are doing a competitive review for suppliers to

enhance our existing offering to directors.”



This section covers methods used to increase the effectiveness of Board operations via evaluation,

education, assessment and succession planning.

Board performance

Approximately two-thirds of survey respondents report having a formal director evaluation process, out of

which the vast majority conducts the performance evaluation once a year.

Only 26% of organizations conduct their director evaluations through a third-party consultant. All other

organizations conduct the evaluations internally.

Methods of evaluating Board directors include individual peer-evaluation led by either the Corporate

Secretary or other in-house personnel, or a peer-evaluation led by a third-party facilitator.


Director education and assessment

The majority of organizations have a formal policy for director education that is publicly disclosed.

For the purpose of evaluation and assessment, annual formal Board evaluation processes using third-party

professionals, peer evaluations and self-assessments are common methods used.

Most organizations encourage their directors to receive education and training for relevant topics to help

the organization grow and prosper. Based on the results of our survey, we have noted that just less than

50% of directors actually participate in the education programs available to them.


The nominees for the Excellence in Governance awards conduct very detailed assessments of director

capabilities and foster a culture of training and education at the Board level.

Some organizations use psychometric testing to get a clearer picture of the skills, capabilities and

personalities of directors. Moreover, directors conduct assessments with the Chair and also conduct self-

assessments.

One nominee cautioned that assessments should be conducted for quantitative and qualitative results.

Excellence in Governance award nominee example

One financial organization used to rate everything on a scale from 1-5, soon learned that this wasn’t

as effective in providing feedback in a way that could help the director improve. In order to

provide valuable information to Board members, organizations should have a rating scale as well

as a place for open-ended responses. This allows for further analysis to find common themes and

create a list of action items.


New directors

Nearly 75% of organizations have a formal orientation program in place for new directors. Based on our

discussions with the nominees for the Excellence in Governance awards, we found orientation programs

may include a full day director orientation, mentors for new directors, site visits, and rigorous training

programs.

Our survey showed that many organizations have detailed orientation plans for new directors which include

formal training and education on a wide range of topics.

Directors are usually made aware of these education programs through the corporate secretary or

alternatively, through other directors or management.


“New directors go through an orientation program that covers all business groups and key

corporate functions, and ongoing training and education is set aside on meeting agendas for

education topics and in-depth review.”

CEO evaluation

Approximately 80% of respondents have a formal policy for CEO performance evaluation and most

commonly this evaluation is conducted once a year. The prime responsibility of conducting the CEO’s

evaluation is mostly given to the entire Board or the compensation committee as shown below.


A financial services organization has a standard on-boarding plan as well as a customized plan for each

director, tailoring it to their level of previous training, education and prior experience. During that process

they have connection meetings with members in each area of the organization.


CEO succession planning

Only 49% of our respondents have a formal succession planning policy for the CEO that is currently in

place or is being implemented.

About half of the respondents review these plans annually; while 30% review succession plans only when

there is a specific development requiring them to do so.


Mission critical staffing

Turnover at the executive level is always a concern. Although most organizations estimate that less than

10% of their executive team will leave the organization over the next 3 years, others are not as optimistic.

When creating a recruiting strategy to fill some of the mission critical executive roles, most organizations

seek to have a balance of internal and external talent.

Our interviews with the nominees for the Excellence in Governance awards helped shed some light on

retention of key employees. Some of the ways they increase retention are through:

Identifying high performance individuals and engaging them in social interaction with the Board

Succession planning at the executive level which is reviewed every 6 months

Formalized programs for coaching and mentoring programs

Building the right culture where employees believe in the goals of the organizations and are able

to enjoy their work

Creating informal leadership roles by project where management is given the opportunity to take

on additional responsibility

Almost two-thirds of organizations feel that they are prepared to fill mission critical roles. However, 33%

stated that they are only moderately confident in their ability to fill the roles.


“Over the years, there has been more interaction between the Board and non-executives, where they are

able to present issues to the Board…if we see potential in a candidate we make sure they have the

opportunities to build rapport with the Board.”


Role of the corporate secretary

Corporate governance

Corporate governance is a standing agenda topic at some organizations and the corporate secretary is

responsible for managing the organization’s governance practices, tracking new trends and ensuring that

the Board and organization are up to date on all corporate governance matters. Through our interviews

with the Excellence in Governance award nominees, we found that a good corporate secretary will push the

Board for continuous improvement in their governance practices.

Linking to the external environment

The corporate secretary needs to keep an eye on the outside environment to ensure they are fully informed

when it comes to trends in corporate governance, emerging issues and best practices. It is part of their role

to bring this information forward to the Board and engage them in discussions.


“At regular Board and committee meetings, the corporate secretary is knowledgeable of all

discussions…this minimizes gaps in information and insight that is available to internal and external

situations.”

“The corporate secretary is crucial to ensuring the Board is fully prepared and informed.”

Informing and preparing the Board The corporate secretary needs to work to ensure the Board is prepared and informed. The information

should be put in the context of what the Board needs to know in order to exercise their due diligence and

roles. The corporate secretary works to ensure there is consistency in Board documents and that only the

most relevant material is being presented to the Board.

Two-way dialogue between stakeholders The corporate secretary is the intermediary between the Board and the organization. In many cases,

organizations have their governance practices centralized through the corporate secretary to ensure all

information has gone through a vetting process and is presented in a way that the Board can easily

understand.


What makes an appropriate Board?

Many organizations have mentioned that the appropriate Board consists of a mix of skills, which generally

focuses on key competencies, areas of expertise and diversity requirements. Organizations are not willing

to recruit a Board member for the purpose of filling a diversity quota, but are actively looking for a Board

that represents the customer base they serve.

The organizations we spoke to have a skills assessment process and skills matrix which allows them to

determine where possible gaps in skills and knowledge exist among the Board. They use the skills

assessment to recruit directors based on long term requirements. In some cases, directors are asked to self-

identify and give a justification of their skills during the assessment process. When a director’s tenure is

expiring or they are expected to retire, the organization will often look to recruit for similar skill sets to the

director they are losing.

Many organizations use external recruiters and encourage the current Board members to give names of

contacts in the industry who meet the requirements set out by the skills matrix. Names and applications

then go to a selection/nominating committee of the Board to determine the short-list and interview process.


“Our company does an analysis of what we expect from Board members to contribute, and do a gap

analysis through the Board assessment process.”

“We look for directors even when we don’t have vacancies on the Board, understanding the needs

and mapping it against the existing Board.”



Stakeholder communication

The CEO is most often selected as the primary contact point for investors, regulators and the government.

In some cases, the Investor Relations Officer (IRO) or the corporate secretary are considered the primary

point of contact. Although it is typically an executive who is the point of contact for stakeholders, this year,

we have noticed a slight increase in the number of times the Board communicates with stakeholders.

The proportion of respondents indicating that the Board interacts with shareholders less than twice per year

is still over 50%, however there is a slight increase in Board communication with stakeholders 3 or more

times per year. Regulators and the media are the stakeholders that the Board interacts with most.


The chart below indicates how many times Boards participate in communicating substantive issues to

various stakeholders (such as analysts, shareholders and investors) in the past year.

In some cases, Boards do not interact directly with shareholders in order to maintain the Board’s focus on

strategy, and thereby avoid potential regulatory issues. Most organizations engage with shareholders

primarily through the corporate secretary or the Investor Relations Officer (IRO) as they are typically better

equipped with information and knowledge of day-to-day operations.



“We have very strong coordination internally between the investor relations and the corporate secretary

and are able to effectively communicate with all stakeholder groups.”

“We aim to stay involved with our stakeholder groups; our manager of public affairs has a disciplined

program to ensure our CSR program is applied to the right areas with ongoing dialogue.”

Engaging with stakeholders

Nominees for the Excellence in Governance awards outlined several benefits and problems in

communicating with various stakeholder groups.

Benefits

Better understanding of what stakeholders are looking for. Ongoing dialogue with various

stakeholder groups gives organizations the opportunity to elicit feedback and identify emerging

issues

Staying involved with stakeholders helps to promote economic development and achievement of

developmental goals

Forming partnerships with stakeholders can build credibility

Engaging with stakeholders and creating open dialogue allows organizations to maintain

transparent relationships

Establishing relationships with stakeholders makes it easier for organizations to reach out when

problem situations arise. Stakeholders will be more sympathetic to someone they know than to an

organization who only reaches out when they need something

Problems

Stakeholder communications requires time and attention

Can receive different messages and issues from opposing stakeholder groups, and conflicts can

arise from helping one group over another

Directors need to be conscious of the legal issues when engaging with stakeholders, and should be

coached beforehand

Stakeholders may not always want to engage with directors if there isn’t a problem


“We engage and reach out to the stakeholders of our organization. There is always a benefit from

engaging whether we agree or disagree with their point of view.”


Boardroom diversity

This section covers perspectives on how Boards define ‘diversity’ and what measures they have put in place

to achieve their diversity targets, if any.

Overall diversity

The Excellence in Governance award nominees define diversity around having different thoughts and ideas.

What constitutes diversity varies: educational backgrounds, professional backgrounds, industry experience,

customer experience, race, gender, sexual orientation, religion, socio-economic status, language,

generational differences, or nationalities.

Less than one quarter of the respondents have a formal Board diversity policy although many are

considering implementing one. But this number has significantly increased from our 2013 results where

over half of the respondents said they did not have a formal policy and were not considering implementing

one. We hypothesize that this is a result of a majority of organizations standing against the concept of

‘quotas’ as this undermines the importance of skills and expertise during the recruitment process.

Many organizations develop a matrix with various factors (based on self-identification) including age, sex,

gender, race, etc. alongside existing skills and expertise on the team. They use this opportunity to identify

gaps and opportunities and alter recruitment/promotion objectives accordingly.


When recruiting directors, organizations focus on gaps in competencies and fill positions with candidates

that meet their needs in terms of skills and expertise. The Canadian organizations who lead in Boardroom

diversity seek to ensure they have a wide pool of candidates to choose from when electing new directors.

They don’t just seek to hire a person that is known in the industry or is already a director. Instead,

organizations try to have a large pool of qualified candidates that include a number of people who are

women or members of a visible minority. Some organizations try to stay away from setting diversity targets,

but look to have a Board that is reflective of their customer base.

Although gender and racial diversity are still low on the list of critical factors for recruiting Board members,

we anticipate these factors will increase in importance over the coming years. Many survey participants

listed increasing regulation and scrutiny around Boardroom diversity as being an expected trend for

corporate governance in 2015.


“In our hiring program, if all things equal, we will often give the position to the candidate who has

diversity characteristics.”

“We are proud of the record we have with establishing diversity at the Board level. We not only adhere

to a skills matrix, but also pay attention to diversity.”

“Diversity isn’t necessarily about ethnicity or gender…diversity is about creating the right Board, full

of the right people with qualifications, skills, experience and background that can add value to executive

management.”


Facts & figures within the Canadian Boardroom

Boards with female representation 80%

Boards with visible minority representation 41%

Common age of the youngest director Over 40 years old

Common age of the oldest director 70-75 years old

Simple average age of the Board directors 56-60 years

Boards including non-residents of Canada 32%

When comparing statistics year over year, we have seen no change in the number of women or the number

of visible minorities serving on Boards. Among Boards who do have women and a visible minority serving,

the percentage representation of total composition is typically less than 25%.

The majority of organizations who have a higher percentage of female Board members are typically from

broader public sector organizations (including crown corporations and not-for-profits).


“We look at the value that women can bring to senior management positions that would drive them to

be future Board members in organizations.”

“30% of our Board members are female. Not because we have targets, but we look at the skills and

capabilities of individuals, and they happen to be female.”


Recruitment of Board members

49% of respondents do not have a formal recruitment policy; however 44% do have a fully implemented

policy in place. This is significantly higher than our 2013 survey results where only 33% had a formal

policy in place.

Half of our survey respondents have a formal director term limit policy in place, which has increased from

35% in 2013. A term limit between 3 to 6 years of service is the most popular among organizations who

do have a policy in place.

Nearly 85% of organizations have no restrictions on the number of Boards a director can serve on. Most

organizations have between 6 and 10 Board members in total. Survey results show that over 95% of

organizations have directors that serve on more than one Board.


Hurdles to greater Boardroom diversity

We asked nominees for the Excellence in Governance awards what hurdles they face in achieving greater

Boardroom diversity. The main issue deals with the selection pool of candidates. Most people perceive

that in order to be a director, they need to have past Board experience, or come from a certain field, and

thus the pool of “known people” from which firms recruit has less diversity.

Some organizations feel that diversity can be achieved through asking tough questions and developing a

plan to tackle the issues.


“We are supportive of the recent Ontario Securities Commission initiative, because it strikes the balance

with their ‘comply or explain’ approach.”

“We are hopeful that quotas will not be required, even though some commentators express concerns

of plateau in terms of Boardroom diversity.”

“Quotas are a terrible way to increase diversity. We applaud those interested in agencies like Catalyst

Canada who go out to encourage people to adopt these best practices.”


One organization looked at their diversity statistics and started asking “why?” They had policies to

achieve diversity targets but in some areas they were under-representing certain areas of the community

they served. In order to overcome these challenges, the organization created a recruitment campaign

targeted at directors from this diversity group.


Risk management & executive pay

Risk management is noted as being a top of mind issue for Canadian Board members. This section covers

organizational risk and the differences in executive pay practices in organizations across Canada.

Risk management

Organizations have begun to place major importance on the topic of risk management. Nearly 65% of

respondents have a formal risk policy in place, of those the majority have a policy fully implemented.

Many organizations have also introduced a Risk Committee at the Board level. Canadian Boards are most

focused on operational and financial risks while fewer Boards focus on human resources or environmental

risks. Most organizations have the responsibility of managing risk allocated to the entire Board while some

delegate the responsibility to the Risk or Audit Committees of the Board. Most organizations also have a

corporate wide system for enterprise risk management. Often, individual departments are also responsible

for the tracking and monitoring of their risks and they are continuously monitored and updated by these

committees and management.


“We have a well-articulated Risk committee at the Board level that is dedicated to looking at the

organizational risk and ensuring that systems, policies, tolerances and limits are in place to control and

manage risk.”

Risks are categorized based on the level of importance and their effects on overall business operations. In

order to strengthen risk governance, many organizations have begun to introduce quarterly or annual

disclosures in the form of risk reports. As indicated on the next page, risk management responsibilities are

also incorporated into performance goals, especially that of senior management.


When looking at year over year statistics, we have seen a 12% increase in the percentage of responses who

include risk management in the performance goals of senior management. The number of organizations

that do not include risk responsibilities in their organizational goals has decreased from 25% to 19%.

The risk management considerations that are most considered in incentive plans include a portion of the

annual incentive tied to overall corporate results, multiple incentive plan metrics, and balancing the short

and long term incentives.

Executive pay

Incentive plans for executives

In terms of designing an executive pay program, ‘market practice’ and ‘company performance’ have the

biggest impact on the final design of executive compensation.


More than half of the respondents review their executive compensation on a continuous basis, while the

rest only review it if there is a specific development that requires them to do so.

Managing executive compensation strategy

65% of the survey respondents agree that the executive compensation strategy aligns with the

overall corporate strategy and 28% have a neutral opinion

55% agree that it contributes to the setting of the overall strategy, while 36% had a neutral opinion

59% said it provides adequate information for executive compensation oversight, 33% had a neutral

opinion

Only a few organizations felt that their executive compensation strategy does not align and contribute to

the overall strategy or provide the Board with adequate insight.


“There is definitely a need for external compensation consulting given the increased complexity of

executive pay.”

Influence on executive compensation

There are several resources that organizations use to obtain advice on executive compensation for their

executive management teams. The most prevalent resource is to use external compensation advisors.

More than half the respondents currently engage an external compensation consultant to obtain advice on

executive pay policy, as indicated below:


Performance incentives

The most frequent incentives used by respondents to measure performance include the following:

Financial performance: Usually measured by metrics such as profits, revenue, cash flow, earnings per

share, return on investment, economic value added, to name a few.

Individual performance: Measured through the individuals’ goals against performance.

Operational performance: Includes measuring unit cost, productivity, labour efficiency, product quality,

speed of production, etc. to determine level of performance.

Customer feedback: Despite being the least frequent measure of performance, it is still used widely as

indicated below. This includes measures of satisfaction, attraction and loyalty, and is obtained through

surveys, questionnaires and other forms of market research.


In some organizations, executive compensation is directly linked to the achievement of established goals.

The pay-at-risk increases in proportion to an executive’s accountability to deliver on their goals. Most

organizations link the achievement of goals to both short and long term performance goals.

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