2012 - haygroup.com Governance Report for...in a constant state of evolution. ... nature of the US governance model. ... corporate governance issues at the board and management level

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.


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


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


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.


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


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


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


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.


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


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.


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.


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.


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.


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.


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.


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.


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.


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

Documents

2012 - haygroup.com Governance Report for...in a constant state of evolution. ... nature of the US governance model. ... corporate governance issues at the board and management level