Thought Capital

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.

In an environment where investors, public and private, big and small, are placing mounting pressure and expectations on Canadian companies, corporate directors are on the frontlines. Topics such as sustainability and social issues are slowly making their way into the boardroom, and to some extent into incentive plans, while IT risk mitigation and cybersecurity remain top-of-mind across industries as companies adapt to digital forces. This survey draws out prevailing topics and analyzes the results to understand how industry, company size, and even director tenure, are driving perspectives and practices.

On October 16, 2018, the day before recreational cannabis was legalized in Canada, the combined market values of Canada’s seven major licensed producers (“LPs”) was $41B, reflecting an average market capitalization to revenue ratio of ~200x . In aggregate, this group of companies experienced a 675% increase in their market values over the one-year period leading up to legalization day. However, two weeks after legalization, the combined market value for this set of cannabis companies had fallen over 30%.

As an indication of the increasing focus on environmental, social, and governance or “ESG” matters, one of the world’s largest oil & gas companies announced this week that it would incorporate Net Carbon Footprint targets in its executive compensation program.

Principles for corporate governance and compensation programs transcend across different types of enterprises – whether publicly-traded, privately owned or commercial crown corporations. But there are important differences. The Institute of Corporate Directors and Hugessen Consulting invite you to a one-hour webinar where we will explore the best practices in the oversight of executive compensation in private and commercial crown enterprises.

Shareholders are becoming increasingly vocal on the relationship between shareholder interests and management behaviour, particularly in extractive industries. Ontario Teachers’ Pension Plan (OTPP) recently released an article entitled, “Is Management Compensation Rewarding the Right Behaviour?” where they outlined four considerations for E&P Boards in the face of heightened shareholder scrutiny. This article outlines Hugessen’s view of OTPP’s four recommendations and provides practical considerations for Boards as they contemplate how to address potential changes in incentive design. We note that while the article comments mainly on extractive companies, we believe the concepts to be applicable to Boards across all industries.