Thought Capital

The recent downward trend in equity values is presenting challenges for boards from both a talent retention and an equity usage perspective. This briefing discusses the concept of a “value-for-value” stock option exchange as a potential response, including practical considerations around applicability and various legal, tax, and accounting implications.

We are living in challenging and unprecedented times. As circumstances continue to evolve, we encourage caution against making any significant changes to compensation approaches or decisions at this time. This briefing provides the implications, as we see them, on executive compensation, and practical approaches for compensation committees.

BlackRock CEO Larry Fink’s 2020 letter to CEOs makes it clear that climate change and sustainability issues will continue to be a hot topic for investors in 2020. In this annual letter, Fink asserts his view that climate change risk is investment risk; as such, he predicts investors will begin to allocate their capital towards sustainable investing, rely more heavily on disclosure to determine the degree to which companies are addressing climate risk, and exercise their voting rights accordingly. Here, we detail our key takeaways from his letter, and implications for directors serving on public company boards.

Institutional Shareholders Services (“ISS”) and Glass Lewis (“GL”) have updated their 2020 voting guidelines for Canada and the U.S. The updated guidelines from ISS will apply to shareholder meetings for publicly-traded companies on or after February 1, 2020, while those from Glass Lewis will apply to meetings held on or after January 1, 2020. This memo provides a summary of policy updates on compensation-related and select board-related topics for the Canadian market.

It is not uncommon for boards to appoint a special committee to address unique situations facing the company such as a strategic review or possible M&A transaction. Due to the workload and time commitment associated with serving on a special committee, directors typically receive supplemental compensation for this work. In our experience, boards can struggle with determining the appropriate quantum and structure of pay for special committee members. This article provides general guidelines to assist boards in making decisions pertaining to special committee compensation.

By way of enhanced disclosure, interested stakeholders can now analyze board-determined corporate performance scores, as disclosed in a company’s Management Information Circular. Corporate performance scores shed light as to how boards are thinking about corporate performance assessment and how it is actually being measured. This article presents key findings from a recent analysis conducted by Hugessen which considers annual short-term incentive plan corporate performance scores for constituents of the S&P/TSX 60 for the years 2012 to 2017. The analysis has implications for Boards as they consider performance standards, performance assessment, disclosure, as well as pay benchmarking and incentive design, and may be used by stakeholders in discussions about executive pay, and its alignment with performance.

The Federal Government has progressed its intention to make changes to stock option taxation in Canada. This is consistent with the 2019 Federal Budget, which indicates that for “large, long-established mature firms,” the ability for the recipient to access a “capital gains” type deduction will be limited to $200,000 worth of optioned shares per year.

Hugessen has completed its annual review of the 2019 TSX60 proxy circulars, and we are pleased to share key findings on pay levels, pay design, regulatory updates, Say-on-Pay results and trends in the shareholder community. Some highlights include: - Median CEO pay decreased by 4% year-over-year to ~$8.1mm, following a substantial increase of 13% the year prior - Say-on-pay support through the 2018 proxy season remains strong with an average support level of 92% - Median director compensation increased by 10% in 2018 to ~$215k - The need for effective shareholder engagement continues to expand as public companies are continuously held to increasing scrutiny regarding matters of value creation, governance and environmental & social impact

The topic of ‘diversity,’ writ large, is top of mind for the boards of Canadian companies of all sizes and across all industries. Studies have demonstrated time and again the benefits of a diverse board of directors, from increased diversity of thought to improved corporate financial performance. With the rise of #MeToo, and numerous other social and political movements currently shining a spotlight on gender equality (or lack thereof) within society more broadly, the leaders of major Canadian companies are rightly continuing to take a closer look at gender diversity and equality within their own organizations. Of particular focus is the representation of women at the highest levels of the corporate world – i.e. boards of directors and executive teams. In anticipation of the 2019 proxy season, we follow up on our June 2017 article “TSX60 & Board Gender Diversity” with a look at 2018 TSX60 proxies and board diversity practices.

Institutional Shareholders Services (“ISS”) and Glass Lewis (“GL”) have updated their 2019 voting guidelines for Canada and the U.S. The updated guidelines from ISS will apply to shareholder meetings for publicly-traded companies on or after February 1, 2019, while those from Glass Lewis will apply to meetings held on or after January 1, 2019. This memo provides a summary of policy updates on compensation-related and select board-related topics in both the Canadian and U.S. market.