How we ranked Canada’s corporate boards

For the 16th year in a row, Report on Business has rated the work of Canada’s corporate boards using a rigorous set of governance criteria designed to go far beyond minimum mandatory rules imposed by regulators.
Markers at the Clarkson Centre for Business Ethics and Board Effectiveness at University of Toronto examined the boards of directors of 242 companies and trusts in the S&P/TSX composite index to assess the quality of their governance practices.
The chart shows marks awarded for individual questions under four broad subcategories. Some of the marking criteria or weightings have changed from the prior year. Among the changes in 2017, Board Games added new criteria to assess the value of a company’s shares that are held by the chair of the board, and to reward longer vesting periods for stock options.
The methodology also includes a new requirement for companies to explain their response if they received a low level of support in the prior year’s say-on-pay vote, as well as a new requirement that compensation plans contain provisions that make it possible for a CEO to receive no bonus or share plan payout if performance is weak.
Because of the changes, the marks in 2017 are not directly comparable with those of prior years.
The marks are based on information published in the most recent annual shareholder proxy circulars of companies who were members of the composite index as of Sept. 1.
Four companies in the index at that time were not marked because they were in the middle of a merger or did not provide sufficient information to complete the marking.
All references to directors also include trustees at income trusts. All references to shares also include units of income trusts.
Board Composition, worth 34 marks out of 100
1. What percentage of the company’s directors are fully independent?
Four marks for boards with at least two-thirds of independent directors. Two marks if more than 50 per cent of directors are independent. Zero marks if there is a majority of related directors.
Note: Independent means directors have no links to the company beyond their board role. That means, for example, they are not management, relatives of management, former members of management within the previous five years, or people whose firms do business with the company – including, for example, lawyers, accountants, suppliers, or investment bankers. Directors will be considered related if they are paid extra compensation by the company for providing non-board services, such as consulting work. We also mark as related those directors who are controlling shareholders of the company or who work for a parent company that controls the public subsidiary.
2. What percentage of the audit committee is fully independent?
Three marks if the committee is fully independent. One mark if there are one or more related directors who are not management. Zero marks if a member of management is on the committee.
3. What percentage of the compensation committee – the committee that determines executive pay – is fully independent?
Two marks if the committee is fully independent. One mark if there are one or more related directors who are not management. Zero marks if a member of management is on the committee or if there is no committee.
4. What percentage of the nominating committee – the committee responsible for recommending new directors to join the board – is fully independent?
Two marks if the committee is fully independent. One mark if there are one or more related directors who are not management. Zero marks if a member of management is on the committee or if there is no committee.
5. Is the role of chairperson and CEO split?
Five marks if the roles are split and there is a fully independent chairperson. Two marks if they are split, but the chairperson is a related director. One mark if they are split, but the chairperson is a member of management. Zero marks if the roles are not split.
Note: There is no credit for not splitting the roles but having a lead independent director on the board.
6. a) Do two or more directors sit together on two or more other boards of publicly-traded companies, creating the potential for a close-knit bloc of directors? Or, do three or more directors sit together on any other corporate board?
One mark if no, zero if yes.
6. b) Do any directors sit on four or more S&P/TSX company boards?
One mark if no, zero if yes.
7. a) Are there any women on the board?
Three marks if at least 33 per cent of directors are women. Two marks if 25 to 33 per cent of the board are women. One mark if there is at least one woman on the board. Zero marks if there are no women.
7. b) Does the company describe a formal policy regarding gender diversity for the board of directors and senior managers?
Two marks if the company discloses details of its policy and includes an internal target for the proportion of women on the board with specifics of the target details, and a timeline for achieving the target. One mark if the company describes a detailed diversity policy with specific features related to improving the representation of women on boards, but doesn’t have a target or doesn’t disclose a timeline for achieving a target. Zero marks if the company doesn’t have a diversity policy or doesn’t describe specific steps it takes to ensure diversity is reflected in recruitment. That means zero marks if a policy mentions several different types of diversity without disclosing any specific features related to improving gender diversity.
Note: Companies that have a target and have already met it do not have to have a timeline for achieving their target. Also, companies with gender parity on their board will receive two marks even if they have not adopted a formal target.
8. Does the board have a system to evaluate its performance?
Three marks if there is a formal board evaluation and a formal individual director evaluation including peer review, with detailed disclosure of what sort of process is used for both. Two marks if there is a formal board evaluation and director evaluation, but no peer review. Also two marks if the company has a formal peer review process but does not mention or describe any board or committee review process. One mark if there is a formal board assessment, but not an assessment of individual directors, or if there is reference to a director assessment but not board or committee review. Zero marks if there is no evaluation or there is only a vague description of how the assessment is done with no details of the process used.
9. Do independent directors meet without management?
Three marks if they meet without management at every board meeting, including special meetings and not just regularly scheduled meetings. Two marks if they meet without management at regular board meetings, but not all board meetings. One mark if they meet sometimes, but not every regular board meeting. Zero marks if there is no mention or if there are no meetings without management. Also zero marks if the company uses vague wording – for example, that “time is available for in-camera meetings” – that do not specify whether the meetings are actually held.
10. Does the company disclose the process the board uses to manage succession planning for the chief executive officer’s job? Disclosure must go beyond simply noting that the board or one of its committees is responsible for managing succession planning. There must be evidence a formal process is in place and some detail of how the board approaches the task must be given.
Three marks if yes, zero if no.
11. Does the company provide information about its director education processes for the year and is there evidence that a formal process is in place? This could include information about educational events offered to the entire board during the year, site visits to company facilities by directors, or specifics about special briefings, courses or training offered to some or all directors.
Two marks if the company fully describes education processes, including details of each specific training session that was held and who attended. Full marks will not be given if the company simply lists educational topics without giving details of the specific training sessions because it is unclear whether the topics were dealt with separately at specialized training sessions, or at a single training session during the year, or during a regular board meeting. It is also insufficient to list training topics “offered” or “available” to the board if the disclosure is not clear whether the training actually occurred and who took advantage of it. The company does not have to list each name if it says everyone on the board or a specific committee attended, but does have to disclose details of who attended if the session was attended by a smaller number of directors and not the entire group. One mark if the company gives a full description of education processes but leaves out some details about events and who attended. Zero marks if no training is disclosed or if there is so little detail that it is unclear what training occurred.
Shareholding and compensation, worth 30 marks out of 100
12. a) Are directors required to own shares or share units?
Three marks if the requirement is equal to at least three times the retainer (calculated as the value of both cash payments and equity grants) paid to directors – including the value of grants of shares or share units, and if there is a time frame disclosed for directors to reach their ownership requirement and return to the required level if they fall below. One mark if there is a requirement, but it is lower than three times the value of the retainer and share units. One mark if the company allows directors to meet their ownership value by using a measure other than the current market value of their equity – such as using a historic average value or using the acquisition value of equity at the date it was first obtained. This is because these values over time can lead to lower actual share ownership by directors when the share price declines. Zero marks if there is no share ownership requirement.
12. b) How many shares do directors own? We calculate the value of directors’ equity holdings at the end of the fiscal year (typically Dec. 31) and compare that with the value of the retainer paid to directors, which includes both cash payments and any equity grants.
To measure director share ownership, we include the value of shares and long-term share units held by the director. We do not include stock options or types of share units that have not yet been earned by directors. Those can include performance units that are contingent on future conditions that have not yet been achieved, or units that only vest if directors stay on the board for a certain number of years into the future and will otherwise be worthless if the director resigns sooner. Such units have not yet been earned by the director, who could resign before the time limit is reached.
Four marks are available, but minus one mark for each director who owns less than three times the annual retainer (including the value of grants of shares or share units). If a director has been on the board less than one year, the ownership requirement does not apply. If a director has been on the board one to two years, the required ownership level is reduced to one times the value of the retainer and share units.
Note: CEOs and board chairs who are also directors are not included in the marking because their share ownership is assessed separately. That means there will be no deduction for this question if the CEO or chair does not meet the director share ownership threshold.
12. c) How many shares does the chair of the board own? We calculate the value of the chair’s equity holdings at the end of the fiscal year and compare that with the value of the retainer paid to the chair, which includes both cash payments and any equity grants. The calculation includes the same equity elements as 12. b).
One mark if the chair owns more than three times the annual retainer. If the chair has been on the board less than one year, the ownership requirement does not apply. If the chair has been on the board one to two years, the ownership requirement is reduced to one times the value of the retainer and share units.
13. a) Is the CEO required to own shares?
Two marks if there is a requirement to own at least three times the base salary or if the CEO is the company’s controlling shareholder. One mark if there is a requirement to own one to two times the base salary, or if the CEO can meet the ownership requirement by using a measure other than the current market share of the shares, such as a historic average or the acquisition value of the shares. Zero marks if there is no requirement or if the requirement is less than one times the base salary.
13. b) Does the CEO own shares?
To measure CEO share ownership, we include the value of shares and long-term share units held by the CEO. We do not include stock options or types of share units that have not yet been earned. Those can include performance units that are contingent on future conditions that have not yet been achieved or units that only vest if a CEO stays in the job for a certain number of years into the future and will otherwise be worthless if he or she resigns sooner. Such units have not yet been earned by the CEO and could be worthless if he or she resigns before the time limit is reached.
Three marks if the CEO owns shares worth at least triple his or her base salary. Two marks if the CEO owns shares worth at least double his or her base salary. One mark if the CEO owns one to two times his or her base salary. Zero marks if the CEO owns shares worth less than one time his or her base salary.
Note: There is no ownership requirement for CEOs on the job for less than one year. CEOs who have been in the job more than one year but less than three years get three marks if they own shares worth at least one time their base salaries and two marks if they own half to one times their salary.
14. Does the company disclose the total value of the CEO’s accumulated shares and share units or equivalent equity holdings in one location in the proxy circular, and are the components broken out individually? This helps shareholders to see whether and how the CEO is financially aligned with shareholders, and illustrates the extent to which the CEO owns common shares versus share units.
Two marks if the value of shares and share units (including restricted share units) is disclosed and the company breaks down how much of the total comes from each type of holding. The value of performance share units and stock options does not have to be included in the list because their ultimate value is uncertain, but there will be no deduction if they are included as separate items if they are clearly explained.
One mark if the company includes the total value but does not break out the separate components. Also one mark if different types of share units are included together in one item when they include performance units whose future value is uncertain or unknown. One mark if options are included in the total, but the company does not explain how they were valued, such as whether the total is based on a mathematical estimate of the future value of all outstanding options, or if the total only includes the value of options that are currently vested and/or in-the-money. Zero marks if the equity value is not disclosed or if the total does not include the value of all shares and share units.
15. Does the company have an anti-hedging policy – without allowing exceptions – for the CEO? Such rules prohibit executives from using derivatives or other financial instruments to retain legal ownership of their shares while reducing their exposure to changes in the share price.
One mark if yes, zero if no.
16. a) How well does the company disclose the compensation policies it applies when deciding CEO bonuses? Does it provide a percentage weighting of the factors that are considered in determining the CEO’s bonus?
One mark if yes, zero if no.
16. b) Does the company provide details of the specific target amounts that have to be achieved in each area?
Two marks if all target specifics are given, one mark if targets are given but all specifics are not provided. Zero if no target details are provided.
16. c) Does the company explain the outcome of what actually happened with the performance goals and how the outcome affected the CEO’s bonus?
One mark if yes, zero if no.
16. d) Can the CEO receive no bonus under the bonus plan design? This addresses investor concerns that some bonus programs virtually guarantee at least some level of payout even when performance is weak, eroding the value of bonuses as rewards for good performance.
One mark if yes, zero marks if no. Zero marks if the disclosure is not clear about whether a portion of the bonus can be paid whatever the performance.
17. a) Does the company compare its performance with that of peers and make relative performance a factor in determining payouts for the CEO’s cash bonus, performance-share-unit or performance-stock-option plan?
This means compensation is affected by a company’s comparative performance and not just improvements in absolute terms, addressing concerns that executives can underperform their peers but be paid a bonus for improved results due to external economic factors such as commodity prices. Using relative performance metrics does not mean comparing or benchmarking pay to compensation levels of peers, but measuring this year’s performance achievements to peers.
One mark if the company discloses whether or not cash bonus or performance equity payouts are based on performance relative to a peer group of similar companies. Also one mark if the CEO does not participate in any short-, medium- and long-term incentive plans. Zero marks if payouts are not based on relative performance metrics.
17. b) Does the company disclose the composition of the peer group used for comparing relative performance? For example, if relative total shareholder return (TSR) is a performance metric, does the company disclose the peers that TSR is measured against?
One mark if yes, zero if no or if no peer group is used.
Note: If the company only uses a peer group for setting its general pay levels and not for measuring this year’s performance achievements, no points will be given.
17. c) Does the company explain the rationale for the peer group it has chosen for measuring its comparative performance for equity payouts? For example, a company might say peer group members are similar-sized companies or operate in the same industry or have similar business characteristics.
One mark if yes, zero marks if no.
Note: if the company only uses a peer group for setting its general pay levels and not for measuring this year’s performance achievements, no points will be given.
18. a) Are there performance hurdles for stock options or share units, beyond simply requiring the share price to rise over time?
One mark if yes, zero if no. One mark if the company never pays the CEO with options or share units.
18. b) Can there be no payout for the CEO’s performance-based options or performance share units? This addresses investor concerns that metrics for some performance share units allow some level of payout under any scenario, even when performance is weak. There must be the possibility for no payout as part of the compensation formula. It is not acceptable to only say the board could later apply discretion to pay no award because it is unclear whether this will occur.
One mark if yes, zero if no. One mark if the company never pays the CEO with any options or share units.
19. Does the company provide a “look back” or “back testing” table in the proxy circular showing how much the CEO has earned over the past five years from all compensation elements, including long-term features such as stock options and share units? The table must show investors how the CEO’s actual pay compared with the intended compensation reported at the time of granting.
One mark if there is a “look back” chart and all long-term pay elements are included with an annual breakdown showing the amount awarded in each year over the past five years, and how the actual payout outcome compares with the intended compensation for each year over the past five years. Zero marks if no information is provided or if it does not include all pay elements.
Note: If a new CEO has been on the job for less than a year, one mark even if there is not a “look back” chart. For CEOs with more than one year but less than five years of tenure, the look-back chart should cover their full period on the job.
20. Does the company disclose the gains reaped by executives from exercising stock options over the prior year?
Two marks if yes, zero if no.
21. Does the company disclose the total cost of compensation to the top executive team compared with a financial metric such as income or revenue? It is not acceptable to only provide disclosure that compares the cost of compensation to share price growth. This is because comparison to a financial metric such as income makes it clear how much compensation costs relative to the company’s financial resources.
One mark if yes, zero if no.
Shareholder rights, worth 26 marks out of 100
22. Does the company give shareholders an advisory vote on executive compensation (known as say-on-pay)? If the company received less than 70 per cent support on its say-on-pay vote in the prior year, does it clearly explain in its proxy circular what changes it has made to its compensation plan?
Three marks if there is a say-on-pay vote, one mark if there is a vote but the company has not explained its response to a low vote in the prior year, zero marks if there is no vote.
Note: It must be clear how many votes were cast both “for” and “withheld” either by giving both numbers, or by giving “for” and the total number of votes cast. Just disclosing the “for” vote alone without context is not sufficient.
23. Does the company disclose it has a provision to “claw back” bonus payments to the CEO if wrongdoing is discovered?
Two marks if yes, and if the policy allows directors to require a “clawback” of payments for anything the board determines to constitute wrongdoing. One mark if there is a policy, but clawbacks can only be ordered if the company’s financial statements have been restated due to wrongdoing. Zero marks if there is no policy.
24. Does the company have a holding period for shares after a CEO leaves the company to ensure there is a performance “tail” to the CEO’s work? This is an incentive to make good long-term decisions prior to departure. Minimum requirement is a one-year holding period after leaving the company.
One mark if yes, zero if no.
25. Does the company require a double-trigger before paying compensation and permitting equity units to vest for top executives upon a change of control? Such a rule means executives don’t automatically receive payments when a company’s ownership changes unless they also lose their jobs.
One mark if yes, zero if no.
Note: One mark if the company has no change-of-control payment provisions. Zero marks if the company allows executives to resign voluntarily after a change of control and still receive payments, unless the permitted circumstances are detailed in the proxy circular. Such reasons might include a material change in responsibilities or a relocation of a job, but they must be specified. Companies cannot simply state that executives can resign for “good reasons” and receive severance payments.
26. a) Are stock options excessively dilutive? Dilution is based on “overhang” or the number of options outstanding at the company’s fiscal year-end as well as the number of options approved for future issuance, expressed as a percentage of all shares outstanding. Where the company has more than one class of shares, dilution is measured for whichever class of shares is diluted by the outstanding options.
Two marks if the dilution is less than 5 per cent of outstanding shares, or if the company has no option plan. One mark if the dilution is between 5 and 8 per cent of outstanding shares. Zero marks if the dilution is over 8 per cent. Zero marks if the company has adopted an evergreen option plan that automatically “reloads” the number of options available for issuance – even if the option dilution level falls within the guidelines listed above. And zero marks if the company has repriced any of its options within the prior year.
26. b) Is the annual stock option grant rate excessive?
Two marks if the number of options granted in the prior fiscal year was less than 1 per cent of all shares outstanding. One mark if the grant rate was between 1 and 1.5 per cent. Zero marks if the grant rate exceeded 1.5 per cent annually.
26. c) Is there a vesting period before options can be exercised?
Two marks if yes and at least some of the options vest over at least five years. This encourages a long-term focus by management. One mark if all options vest between one year and four years. Zero marks if any options vest in less than one year.
27. a) Does the company calculate and display the year-end dilution level of stock options as a percentage of shares outstanding?
One mark if yes, zero if no.
27. b) Does the company calculate and display the prior year’s grant rate for option grants as a percentage of shares outstanding?
One mark if yes, zero if no.
28. Does the company pay directors using stock options or performance-based compensation such as performance share units or cash bonuses? (This does not include shares or share units that are not contingent on reaching performance goals.)
One mark if no, zero if yes.
29. Do all shareholders have equal voting rights?
This question looks at voting rights in two steps, first assessing whether there are non-voting or subordinate voting shares, then assessing whether there are other types of unequal voting rights. Companies with equal voting rights for all shareholders can score a maximum of 10 marks.
Companies start with 10 marks if they have no dual-class shares. If there are subordinate voting shares, marks are reduced depending on the gap between the percentage of votes controlled by the superior voting shares and the percentage of the company’s equity they represent, using the following guidelines: Four marks if the vote-to-equity ratio is less than 3:1. Three marks if the ratio is between 3:1 and 4:1. Two marks if the ratio is between 4:1 and 5:1. Zero marks if the ratio is 5:1 or worse.
If the company has no dual-class shares, we will then review two other issues related to voting rights, each worth a maximum of five marks.
The first issue is whether shareholders can elect the whole board, or whether some directors are appointed (by a shareholder or manager, for example) so that their names don’t appear on the proxy ballot.
Five marks if all directors are elected, three marks if one director is appointed and not elected, two marks if more than one is appointed if not a majority, zero marks if a majority are appointed and not elected.
The second issue looks at whether any party – an administrator, manager or shareholder, for example – has rights unequal to ownership. For example, can anyone nominate directors out of proportion to ownership? Can anyone veto key issues – such as changes to senior management or assets sales and purchases – without owning a majority of the shares?
Five marks if all rights are equal, three marks if a party has disproportionate rights compared with ownership stake, zero marks if a party has rights that have little or no relationship to ownership stake.
Disclosure, worth 10 marks out of 100
30. Does the company provide a full explanation of which directors are related and which are independent and why?
One mark if there is full disclosure and if the disclosure is included in the part of the proxy circular where companies discuss which directors on the board are related or unrelated. Zero marks if company does not disclose a director’s relationship in the proxy circular.
31. Does the company disclose detailed biographies to explain directors’ qualifications to represent shareholders? Relevant information might include educational background, non-profit affiliations, industry experience, career highlights or special achievements. Does the proxy circular specify the skills or areas of expertise of each director in the form of a “skills matrix” or in another format? The details must be explicitly laid out – it is not adequate to assume they can be inferred by reading a basic biography.
One mark if yes, zero if no.
32. Does the company disclose in its shareholder proxy circular the voting results for directors in the prior year’s board elections, as well as the results for the company’s say on pay vote if one was held in the prior year? Such disclosure assists investors in easily reviewing voting information that can otherwise be complicated to access.
One mark if yes, or if the company did not have a vote for directors in the prior year because it is a newly public firm. Zero marks if no. Also zero marks if the company reports the voting result, but nominates a director for election in the current year who did not receive a majority of “for” votes in the prior year’s board election.
33. Did directors attend all meetings and does the company remove directors with poor attendance?
Two marks if all board and committee meeting attendance is disclosed and board members attended at least three-quarters of board and committee meetings. One mark if any board member has missed more than one-quarter of meetings and is not put up for re-election. Zero marks if committee attendance is not disclosed, or if a board member or a committee member missed more than one-quarter of meetings and is put up for re-election.
34. a) Does the company disclose the total accumulated value (a dollar amount, not just number of units held) of directors’ equity holdings, including shares and vested deferred share units?
Two marks if yes, zero if no. Also zero marks if the company discloses the value of directors’ equity holding but the total includes stock options or unvested share units, which are compensation that has not been realized yet and may not be earned.
34. b) Does the company explain how each director’s share ownership meets (or fails to meet) the required share ownership guideline? The disclosure must show the number or value of shares required to be owned, the director’s equity ownership level, and must explain how the ownership compares to the requirement as a percentage, multiple or dollar value.
Note: The ownership must be presented in the same units as the requirement. For example, if directors are required to own a certain dollar value of shares or a specific number of shares, the chart should compare the requirement to the actual ownership in those units.
One mark all the elements are clearly presented, zero if any of the elements are not disclosed for each director. Zero if there is no share ownership requirement for directors. Also zero marks if the disclosed share ownership level of each director is not the current market value, but is instead a historic value as the value when the shares were acquired or a historic average value.
35. a) Does the company disclose directors’ ages?
One mark if yes, zero marks if no.
35. b) Does the company disclose whether or not it has a retirement age policy for directors, and what the details of a policy are?
One mark if yes, or if company states it has no retirement age policy for its directors. Zero marks if no disclosure.
Note: The disclosure must be explicit, and marks will not be given for generic statements about board renewal that do not specifically mention retirement age policies.