Six Tips for Effective Virtual Board Meetings

by | May 18, 2020 | COVID-19, Market Trends, Meeting Effectiveness, Technology

GGA’s Advice for Virtual Board Meetings

COVID-19 has changed a lot of things: supermarket hours, the availability of toilet paper; handshakes are now elbow bumps and hand-washing is accompanied by a catchy chorus. It has also changed things for board members. While many had already started the migration to electronic materials, before the pandemic (remember those days?!), the ‘holdouts’ who still preferred (or were only offered) printed meeting materials suddenly viewed them as potentially viral infested vestiges of a bygone era! And with the influx of new affordable and flexible board technology offerings, the idea of going fully digital has been embraced. At the same time, the original board portals are showing their age with this sudden push into the ‘virtual spotlight’. Their cumbersome and expensive server resident technology is being left behind as boards begin to run board, even annual general meetings, virtually.  

Until very recently,  virtual board meetings comprised a very small percentage of board meetings. But in 2020, virtual meetings became a necessity overnight. With all that is going on, it can be challenging enough for a Board Chair to maintain in-meeting efficiency, making sure meeting agendas run smoothly, and keeping members engaged. With the immediate switch to virtual meetings, the saying “business as usual” has been replaced by the “next normal”. In order to advance to this new norm, boards need to ensure that they are utilizing the correct tools and good governance processes to optimize productivity, place crucial information at a board’s fingertips, and encourages confidential collaboration and decision making in a rapid, time efficient manner. Board meetings should continue to run as effectively and engaged as possible, despite new virtual and socially distancing formats. As a board member, you can take advantage of these opportunities for cost effective and productive virtual board meetings by using the following tips:

Tip #1: Know and Continue to Embrace Your Business’ Culture

First and foremost, review your board governance terms to ensure that virtual meetings are allowed in your organization. If virtual meetings aren’t mentioned or you are unsure, speak with your board chair or legal counsel to clarify any potential ambiguities and make adjustments, as required.

Once all is good to go, reflect on ways to ensure meetings are conducted so they are still in concordance with company culture and philosophy. It would be a good idea to take some time to review company tenants and values. Respect? Diversity? Experience? Diligence? It is easy to lose sight of the bigger picture and individuality when stakeholder interaction resides on pixels. Be sure to remain steadfast in implementing organizational culture – it will keep members motivated, reassured, and conscientious.

Tip #2: Update and Embrace Board Technology

Now more than ever – invest in the ‘right’ technology. Does your board use board software? Does it facilitate virtual meeting efficiencies and effectiveness? Is it checking all the boxes necessary for a seamless and optimal virtual meeting? Do you have live video conferencing, a secure document repository, proxy surveys, on-line voting and automated minute taking in one centralized, secure location? Are all the services you use cost efficient? If not, you are not taking advantage of what the 2020 marketplace has to offer. Far too many times boards are forced to spread themselves thin with multiple softwares and tabs open – leading to a disorganized and disheveled (likely fed up) board member. This also means a less productive and motivated board member – which defeats the purpose of using board management software as it is expected to assist meeting preparation and facilitation, not hinder it. Your software needs to be a central location for all board tasks, easy to navigate, with internal communication features that keep board members connected!

Furthermore, virtual members must be able to see and hear other members. Yep – this means no muting the audio or turning off the video feature. Using the camera and microphone is not only essential to optimizing the virtual experience and keeping others engaged, it is the best way to communicate. 55% of communication is body language and another 38% is tone of voice. That’s a whopping 88% of communication! We all know communication is key – so be sure to have both efficient video cameras and microphones embedded into your technology.

Tip #3: Know Your Virtual Meeting Etiquette

It is spring 2020 and for those familiar with COVID-19 will likely be familiar with the popularity of trending web-cam mishaps as professionals take to work in pajamas, undergarments, or half asleep, underestimating the cameras range and unaware they are ‘sharing’ the experience via live video conference.  

Yes even board members may need to be reminded to approach virtual meetings with the same respect, preparedness and professionalism as you would in-person board meetings. Meeting time is meant for collaboration, productivity, and attentiveness so losing yourself in the abundance of distractions such as emails, web surfing, texting, or afternoon snacks, is not acceptable. It is not only an egregious waste of valuable time; it is also disrespectful to your fellow board members who are actively participating. Join the virtual meeting prepared by reading necessary pre-meeting notes, mute your phone, speak as clearly as possible, keep movements to a minimal, and hold a standard of discipline just as in any other board meeting.

Tip #4: Make the Meeting Feel Comfortable and ‘Normal’

As with face-to-face meetings, if all members make an effort to stay focused; actively participating, actively listening, and sharing insight during the meeting it will reinforce the feeling that this is a ‘normal’ board meeting. It is of utmost importance that there is a mutual sense of respect and that everyone feels heard even though you’re not in the same physical room. This means don’t shy away from small talk, humor, and ‘virtual’ bonding – embrace it. But exercise this in a way that doesn’t derail the flow and progress of a meeting. And just a reminder (as we are sure the lines get blurred with digitized work environments): we are human, not robots!

The “attendance” sheet should show on the meeting screen so that everyone can see who’s present and accounted for. Ideally, utilize a ‘gallery view’ in your electronic meeting software so that you are able to see body language and ‘make eye contact’ (ish). This will encourage conversation and collaboration and is essential to productivity.

In virtual meetings, it is helpful to try to address fellow board members by name if you are addressing them directly, as they can’t tell necessarily tell who you are speaking to. The Chair has to pay extra attention that quieter individuals are heard and that their ideas don’t fall through the cracks! Even if you’re relatively new to virtual meetings, watch and learn from your colleagues. Give feedback to your Board Chair if you feel that there’s a better way to run some aspect of the meeting. Some board software, for example, offer a ‘hand-raising’ function. If there is too much ‘over-talk’ in your opinion, you could ask the Chair to request that members utilize this function. You are on a board because your insight is valued – find the best way to share it!

Tip 5: Optimize Your Virtual Meeting Efficiency and Effectiveness

Virtual or not, everyone wants to feel like they have contributed to the efficiency and effectiveness of the board meeting. These approaches help to ensure this in a virtual environment:

  1. Attention spans can be a bit tougher to manage in a virtual meeting. To mitigate this, keep important agenda items at the beginning when members are most attentive. Agenda items are most productive when concise but conversational, focusing on essential points with regular conversation throughout,
  2. Similarly, the flatter feeling of a virtual meeting may need additional structure or prompts to keep it moving and feeling “alive”. Assign estimated time to the agenda items to communicate the expectation and assist the Chairperson in facilitating the meeting efficiently. Use your board platform tools (if available) to assist with this and provide audible prompts when an item is running over,
  3. Exploit the advantages of the virtual aspect of the meeting. For example, take advantage of the ability to screen share videos and images that were not necessarily easy to incorporate into face-to-face board meetings. Or have ‘experts’ on stand-by to be ‘Zoomed’ in, as required, without having them sitting in a physical waiting room for long periods of time, etc.,
  4. Create/suggest some new meeting norms/processes to enhance the virtual experience. For example, you could have a 15 minute ‘arrival’ period in advance of the call to order to allow for the casual and more personal ‘how are you’s’ that are missing from not being in the same room. This personal ‘verbal’ connection is even more important when you are physically distanced from each other, and finally,
  5. Set up your ‘meeting space’ to maximize your meeting experience and that of your fellow board members. Ensure that you have a good quality microphone and video camera either within or as adjunct to your computer. Test your Wi-Fi and bandwidth ahead of time to ensure that you can stream the meeting without delays or freezing. And make sure that you are in a quiet space so that your peers do not have to listen to distracting sounds from your environment.

Tip 6: Contribute to Enhancing the Virtual Board Meeting Experience

Share feedback with the Chair on the meeting process and outcomes. This should be both informally through post-meeting comments, and formally through additional questions on the annual board assessment. Utilize the tools within the board platform to share ideas, opportunities for improvement to learn and enhance future meetings.

Closing Thoughts

While, like handshakes, many of us look forward to a return to face-to-face board meetings, it’s obvious that the practice of holding at least some ‘virtual meetings’ is here to stay. The foregoing tips should help to make that reality a positive experience for you as we move to our ‘next normal’. To learn more about technologies that can further enhance the remote board member experience with state-of-the art, affordable technology tools, click here to view an overview of GGA’s emPower platform.

Contributing Authors:

Arden Dalik, Senior Partner
Aamani Mohamed

2020 Executive Compensation Amid Market Uncertainty

by | Mar 30, 2020 | Executive Compensation, Market Trends

Effects of COVID-19 on Executive Compensation

With a global pandemic upon us, the world is a very different place, at least right now. However, just like there is no need to hoard cans of tuna and cases of toilet paper, we at GGA believe that it is not advisable at this juncture, to call off your organization’s executive compensation program plans for 2020. In fact, it is times like these that corporate governance, risk management, technology and innovation and board oversight are imperative to preserving shareholder value, while also and most importantly ensuring the health and safety of our employees. 

What we know from other market crises, is that corporate governance and executive retention are high on the list when navigating black-swan events.  If there ever was a black-swan event, COVID-19 may have now assumed the definition. 

We suggest that as long as the Board and/or the CEO maintains the ability to use their judgment on implementation timing, eligibility, etc., for example, then plans should proceed. There are obvious exceptions to this where an organization may not have the available cash flow due to this ‘black swan’ event (e.g. airlines, tourism companies, etc.).

In the interest of brevity, this piece is meant to cover only high level corporate governance and retaining key talent, but we understand that there are broader considerations when factoring in an organization’s complete workforce as many companies may have to layoff some of their staff due to decreased demand for their products/services and the corresponding decrease in cash flow for the business (as we write this a number of immediate family members and friends have already been impacted directly). While we cannot predict the future, we at GGA can share our observations within the marketplace and areas for consideration as boards make decisions over the next few months relating to corporate governance and executive compensation. So far, within the mining and broader commodity businesses, we have seen some proposed delays in work or a cautious movement forward, as planned. 

Areas for consideration during these difficult times include:

Board Oversight

Businesses are continuing to try to make the best of a bad situation and effective corporate governance needs to continue, within reason, in the same spirit, to ensure effective oversight of the organization. How easily is your board able to meet remotely as opposed to in-person? What decisions can be made via consent resolutions versus requiring a full meeting? Have you stress tested the impact of black swan events on your company’s operations? What plan do you have in place to deal with black swan events in a crisis and who is responsible for what?

Retention of Key Talent

Strategies for attraction and retention of executive talent are critical as even in immediately affected companies, the demands on executive teams are typically extremely high, more so than in normal market conditions, to chart out a path forward. If your board has observed a gap to market from a pay perspective, how are you going to let your executive team know that you recognize this gap, but also are taking into account the current market conditions? Some organizations will choose to “stay the course” and implement any compensation adjustments that were determined at the past meeting. Others may choose a more conservative route and announce salary freezes or even rollbacks, depending on the cash flow concerns of the business. A good middle ground might be to approve compensation adjustments in principle but hold off on formally enacting the adjustments for a few months until market conditions have stabilized and better financial projections can be made. In terms of Long-Term Incentive (LTIP) grants, previous grants may have been made at significantly higher share prices so you must also consider what value, if any, executives still have within their LTIP and what the prospects are for this value to rise over the next few months or even years. If you are only granting Stock Options, is there a chance for underwater options to get back in-the-money or is the probability low? If the probability is low, then executives are a flight risk as competitors will be able to offer them new LTIP grants at significantly lower exercise prices than if they stay with your organization. This may necessitate discussion on the need for new retention grants which can be made at a lower share price and increase the likelihood of long-term value to executives, thus acting as a retention device during this period.

Retention Strategy

While retention LTIP awards seem like a good idea in the current environment, these awards must be balanced with the equity dilution level of the organization under its existing equity compensation plans. At lower share prices, the level of equity dilution can increase dramatically and use up much needed room for LTIP grants in the future. In a time like this, stress testing of the impact on equity dilution levels of proposed grants is an important step that boards must conduct before approving regular or retention-based LTIP grants. If proposed grants are too dilutive then consideration of a fixed number of options or units to be granted, that will allow an organization to retain room for future grants, is something that should be considered in the interim until market conditions stabilize. For many organizations, dilution will also not support additional retention awards, so a board may need to consider a performance cash based award, that is granted outside of the shareholder approved equity plan. At all costs, while option surrender programs continue to be allowed by the regulator, categorically shareholder advisory firms consider this an option re-pricing problematic pay practice.

Performance Evaluation

If performance expectations under the Annual Balanced Scorecard have already been approved, the Board should evaluate the performance expectations set and determine whether those expectations are still reasonable in the ever-evolving environment. If expectations are now deemed to be unreasonable in the Board’s view, consideration of revised performance targets based on the new reality should be discussed to ensure executives are still motivated to achieve important objectives over the remainder of the year.

Remember that while retaining key talent is imperative and in shareholders long-term interests, the board must also give consideration to the shareholders who have potentially lost material amounts of their portfolio.  These executives are tasked with not only mitigating the financial blow in the downward market, but also to generate value when markets return.  Ensure your board is not making compensation decisions in a vacuum during these challenging times.  Seek the independent support necessary to give appropriate back testing and scenario analysis prior to making any potential retention decisions.
 

Contributing Authors:

Paul Gryglewicz, Senior Partner
Arden Dalik, Senior Partner
Peter Landers, Partner

Establishing Compensation Programs for Growth in the Cannabis Industry

by | Feb 25, 2019 | Cannabis, Executive Compensation, Governance, Market Trends

Don’t let this opportunity go up in smoke!

It has been two eventful years since the Canadian federal government announced its plans to pass legislation to legalize the recreational use of marijuana. In the U.S., over 80% of the states including California, Colorado, Oregon and Washington have legalized recreational and/or medicinal use of marijuana at the state level.  The California industry alone is projected to hit over $7 billion in a few years. This has led to a growing list of emerging companies in the cannabis space seeking financing through the public markets as they see the opportunity in building up their operations to cater to a significant spike in marijuana use now that it is legalized in Canada and more and more U.S. states are legalizing it in some form or fashion. While listing on exchanges in the United States can still be problematic due to the current U.S. federal ban, Canadian stock exchanges have provided a reputable market for cannabis shares with companies listing on the TSX Venture Exchange and Canadian Securities Exchange (CSE). Certain Canadian listed companies have also been able to dual-list their shares on the NYSE such as Canopy Growth, Aurora Cannabis and Aphria with others such as CannTrust currently in the process of listing in New York. This is providing greater exposure of these stocks to institutional investors and index funds.

This shifting dynamic creates a great opportunity for companies throughout the value chain of the cannabis industry such as research and developers, producers, processors, distributors, wholesalers and retailers to realize significant growth through first mover advantages. However, it also requires that the Boards of Directors of these companies put in place the proper executive compensation structures to attract, retain and motivate its executives to execute on the overall business strategy. Companies must also be aware of the various rules and regulations that come with being a publicly-traded company. For those companies graduating up to major exchanges such as the TSX, greater scrutiny from institutional investors and proxy advisory firms such as Institutional Shareholder Services (ISS) and Glass Lewis on compensation levels and designs can also be expected. With this in mind, here are the top areas boards of publicly-listed and privately-held companies across the spectrum of the cannabis industry must consider when dealing with executive compensation matters as they continue to navigate this exciting time of expansion in 2019.

Top Area of Focus for Executive Compensation

  1. Compensation Philosophy & Peer Group
  2. Executive Compensation Levels
  3. Short-Term Incentive Design
  4. Equity Compensation & Related Documentation
  5. Employment Agreements
  6. Shareholder Engagement 

Compensation Philosophy & Peer Group

A company’s executive compensation philosophy establishes the foundation for its compensation program as it outlines the objectives of the program and the types of compensation to be offered. It also outlines the peer group that will be used to benchmark compensation levels and practices as well as a company’s desired positioning when compared to that peer group. For companies in a rapid growth phase, peers that might have been comparable a year ago from a size and strategic perspective may have become obsolete due to their size or through acquisitions. The peer group for a $100 million market cap company will look a lot different than a $1 billion company! A good rule of thumb is to look for a peer group of companies within 0.5x to 2x the current size of your organization. Then consider other characteristics such as business model, location of operations, product offerings as well as who you would look to recruit from, or who you might lose talent to, within the marketplace. This could include not only cannabis industry peers, but also other pharmaceutical or fast-moving consumer goods companies in regulated industries such as alcohol and tobacco. Companies in high growth mode will also be looking to attract key talent to drive this growth, which may require a philosophy that targets compensation levels closer to the 75th percentile as opposed to the typical peer group median.

Executive Compensation Levels

In the early stages of a business, there tends to be less concern over compensation levels as the majority of compensation is tied to equity compensation that is intended to provide a windfall if and when future share price growth is achieved. As a company matures, the need to attract and retain key talent becomes paramount and requires a better understanding of the compensation provided to similar professionals in a competitive market. In stages of rapid growth and the resulting change of peers (as described above), a competitive Base Salary provided to the CEO in one year might be well below market when compared to a different peer group of larger companies. As a company grows, the need to compete with smaller peers becomes less relevant and the need to compete for talent against larger peers becomes more pronounced. This may require adjustments to executive compensation levels. With this in mind, it is important for companies to take into account the level of growth of their company. In a rapidly changing business environment, the need to review compensation levels on an annual basis is more important to ensure the continued competitiveness of Base Salary and Incentive opportunities against an ever-evolving peer group of companies.

Short-Term Incentive Design

With cash typically at a premium in the early days of a firm, bonuses are traditionally made on a discretionary basis, if paid at all. They might also be provided in one-off situations to secure key talent from a larger competitor or different industry. In either case, there is generally a lack of structure surrounding how bonuses are to be paid on an annual basis. As a company matures, the mix between Salary, Cash Bonus and Long-Term Incentives tends to change with more weight placed on Cash Bonuses, thereby making it more important to place more structure around how bonus payouts are determined. Companies might feel that a Profit Sharing Plan is a good way to structure bonus payouts as many companies use Earnings as one of the key performance metrics to determine cash bonuses. In the cannabis industry, however, accounting rules under International Financial Reporting Standards (IFRS) require companies to value certain inventory on a mark-to-market basis which can greatly impact earnings results, either positively or negatively. This may make earnings less suitable for determining executive performance in a given year. As a result, following the incentive design of a majority of General Industry companies may not be the best way to measure performance. Given many cannabis companies are in a high growth stage, better types of performance metrics might include Revenue Growth, Cash Flow from Operations or specific milestones tied to acquisitions, production levels or Research & Development (R&D). Measuring performance across a variety of metrics (ideally 4 to 5) using a “Balanced Scorecard” design can bring more structure to determining cash bonuses while focusing executives on multiple drivers of future growth for the company. If a company is private and looking to enter the public markets, tying part of their scorecard to achieving their public listing on schedule and at a targeted valuation level can also be considered as well.

Equity Compensation & Related Documentation

The traditional thought process is that any small cap company should conserve as much cash as possible by granting stock options to its executives in order to incent these executives to significantly grow the share price of the company, which will produce wealth for both shareholders and the executives. While this approach makes sense in the early stages of a company, as a company experiences significant growth and investor interest, greater scrutiny is placed on a company’s equity compensation plans. Institutional investors and groups such as ISS and Glass Lewis pay close attention to the level of share dilution allowed under your equity compensation plans. The TSX, for example, limits companies to up to a 10% dilution, while exchanges such as the Nasdaq and TSX Venture Exchange allow up to 20% dilution in certain cases. Those companies graduating to new exchanges should be aware of any changes in the rules governing equity compensation plans as they will greatly impact the allowable room to make future equity grants. No longer can a company run itself with the notion that stock options are “free” as there is a cost associated to them and therefore more structure around how they are granted and who is eligible must be put in place. With the run up in cannabis-related stocks there is also talk of whether a “bubble” is building that is inflating the price of current shares. If the “bubble” were to burst, those executives holding stock options could see the value of their equity fall. Given this possibility, consideration of full value awards such as Restricted Share Units (RSUs) or Performance Share Units (PSUs), that can retain value even in times where share prices may drop, can provide greater retention value for executives in place of stock options. RSUs and PSUs can be less dilutive to equity compensation pools, providing more flexibility to the Board when granting equity to key talent.

Employment Agreements

With the movement from a private to publicly-traded company, or in cases of significant growth and investor interest, greater scrutiny is placed on the employment agreements of your top executives. Shareholders, along with ISS and Glass Lewis, have specific views on severance payments to be made upon a Change of Control of the company (i.e. acquisition of the company) or other termination scenarios. Severance payouts of 3x or 4x eligible compensation (typically Salary Only or Salary + Bonus) were commonly accepted in the past as the cost of doing business. The new acceptable norm is a maximum of 2x for the CEO with multiples of 1x to 1.5x for executives below the CEO, thereby lowering the cost of exiting executives upon a termination scenario. “Single Trigger” Change of Control payments based solely on control of the company changing hands, but not the termination of an executive, have been widely criticized and are being replaced by “Double Trigger” Change of Control provisions – payout is only made to the executive if control of the company changes and they are subsequently terminated from their position within a 12 to 24 month period. Boards of cannabis companies should review the severance provisions being provided to executives under existing employment agreements to ensure they are in-line with new market norms and avoid potential pushback from shareholders.

Shareholder Engagement

Annual General Meetings (AGMs) were considered a “rubber stamp” process for approval of general corporate matters such as the re-election of directors, or executive compensation. In the era of shareholder activism and the rise of proxy advisory firms such as ISS and Glass Lewis, AGMs have become forums to voice disdain, directly challenge executive decision-making, and assert the power of all shareholders to hold a board accountable for its actions. If shareholders’ concerns are not met, they will be heard through the AGM vote. With Majority Voting guidelines becoming more the norm in North America, requiring directors to step off the Board if they fail to receive more than 50% of shareholder votes at the AGM, it is becoming increasingly important for Boards to engage with their top institutional and retail shareholders to gauge their views on issues they deem important. Failure to be proactive increases the embarrassing risk of having one of their directors voted off the board. Boards that fail to embrace the latest in technology solutions dedicated to corporate governance, such as SaaS-based shareholder engagement platforms, deny themselves solutions that can greatly assist the board, executive and Investor Relations team with engagement efforts in an increasingly complex environment. These solutions should be examined as they make the process of engaging with an entire shareholder base much more effective and efficient than the traditional way of doing things.

Proper Due Diligence Maximizes Growth

The past couple of years have provided quite an opportunity for companies across the entire value chain in the cannabis industry due to the relaxation of marijuana laws across North America. While this has led to significant growth for many companies in terms of market cap, the higher amount of investor interest puts more pressure on boards to come up with market competitive compensation packages for its executives that are deemed reasonable by shareholders. By focusing on the key executive compensation issues discussed above, companies across the spectrum of the cannabis industry will be able to confidently defend the process they have followed and the decisions they have made to both shareholders and their executives through their engagement efforts. Opportunity knocks, but without the proper board due diligence the opportunity for growth presented in the current environment can quickly go up in smoke.

 

5 Trends for Executive Compensation in 2019

by | Dec 17, 2018 | Executive Compensation, Governance, Market Trends

USMCA, Cannabis, Energy Sector, Government, Say on Pay All Have an Impact

Several developments over the last year will have an impact on trends in executive compensation for 2019, including the North American Free Trade Agreement (NAFTA) revamp — upgraded to the United StatesMexico-Canada Agreement (USMCA) — increased scrutiny of cannabis companies, “say-on-pay” adoption, and a downturn in the energy sector.

High-sector growth will also drive additional upward pressure on talent and compensation into 2019, which will have a retention impact on the pharmaceutical, fast-moving consumer goods and tech sectors.

Tariffs and USMCA

While the full effect of U.S.-imposed tariffs on aluminum and steel and the new USMCA remain unclear, they could have an impact on how executive compensation is structured for 2019. In late 2018 and early 2019, compensation committees will be working with their advisers and CEO to determine key performance objectives for 2019 for the C-suite. This will include discussions around performance expectations for 2019 to achieve “target,” “threshold” and “superior” performance as part of finalizing the annual performance scorecard used to determine 2019 short-term incentive payouts. With U.S. tariffs and the new trade deal threatening certain Canadian companies, committees are expected to take this threat into account and set performance expectations accordingly. An emphasis on measures such as earnings or revenue may be lowered, with more put on maintaining market share, developing new markets for products or cost-cutting measures to deal with trade concerns.

Cannabis Sector

2018 has seen the continued rise in share prices of cannabis companies, leading up to the legalization of recreational cannabis use as of Oct. 17. Many of these employers have witnessed such rapid growth that their compensation programs have been unable to keep up. They have been playing catch-up by trying to implement more formalized compensation structures for executives and staff. This has forced companies to review the dilution of current equity incentive plans (for many companies, stock options only) which have been highly diluted by equity grants made to attract key executives and staff at much lower share prices. This means current equity pools have little room left to make future grants for new hires heading into 2019. Companies are forced to review who has and has not received equity grants in the past year, and also the share price these grants were made at, to determine who is in most need of a grant to keep them engaged, as well as allow for the equity pool to eventually be replenished and provide the right pay-for-performance balance.

Aside from the cannabis sector, it’s expected companies across Canada (especially small- to mid-cap companies) will review the dilution level in current equity plans when developing 2019 recommendations. For companies looking for shareholder approval of equity plans at the annual general meeting in 2019, conducting this review against Institutional Shareholder Services (ISS) and Glass Lewis guidelines will be imperative to ensure they receive positive vote recommendations and have their plans approved. In addition to equity plans, more structure is expected through the development of balanced scorecards identifying five to seven key corporate and individual performance measures for 2019 to be put in place for cannabis companies to measure 2019 performance and determine 2019 short-term incentive payouts at the end of the year. This trend is expected to grow in prevalence across Canada for all industries as ISS, Glass Lewis and shareholders demand more rigor and structure be put in place to align executive pay with performance — both on an annual and long-term basis.

Downturn in energy sector

The Canadian energy sector has witnessed another downturn in share prices, especially in the energy equipment and services industry. In 2019, energy companies are expected to review executive compensation levels and determine whether downward adjustments (similar to earlier this decade) are required to send a message to shareholders that executives are feeling the pain, too. Companies are expected to review whether short-term incentives should be paid for 2018 at all, or whether deferral into a long-term incentive grant to preserve liquidity for the business and tie executives more to the company’s long-term performance makes more sense. Employers will also face dilution concerns due to lower share prices, so they need to be diligent in ensuring they do not overly dilute their equity pools and restrict their ability to make grants in future years. Focus on the retention of critical talent and high-potentials will be imperative in 2019.

Government intervention

Government scrutiny of executive compensation has received much attention in recent years. During 2018, the Doug Ford government in Ontario rallied against executive compensation at Hydro One which led to the removal of many executives and board members. In Alberta, the NDP government has also shown a willingness to intervene to control executive compensation at universities, colleges, agencies, boards and commissions. With less than one year before an election, will the NDP government implement more rules on executive compensation in Alberta? And will Ford look to intervene in other quasi-public sector organizations? Only time will tell.

Say-on-pay adoption

Say-on-pay failures continued in 2018 with Crescent Point Energy, IMAX and Maxar Technologies each receiving less than 50 per cent approval. While say-on-pay adoption has stagnated of late, the recent announcement by Alimentation Couche-Tard that a say-on-pay vote will be held at its 2019 annual meeting sparked hope that other companies will follow. In looking at Canada’s top 100 companies, close to 30 have yet to adopt such a vote, according to Global Governance Advisors, including corporate titans such as Power Corporation of Canada, Rogers Communications, Canadian Tire and Loblaw.

Will Alimentation Couche-Tard’s decision influence these companies or will these companies continue to lag behind other large companies in Canada? With all these developments, companies are rethinking the structure of their executive compensation programs in terms of the type of compensation offered and metrics used to measure performance. And with the changing economic outlook, they are also determining how to best attract and retain the key talent needed to successfully handle the new reality.

Paul Gryglewicz is a senior partner and Peter Landers is a partner at Global Governance Advisors in Toronto, a human capital management firm providing boards of directors and senior management teams with advisory and technology solutions. For more information, visit www.ggainc.com.