How to Adopt a Dynamic Approach to CEO Compensation

by | Jul 5, 2018 | Board Dynamics, Executive Compensation, Governance, Leadership

Mitigate Risk and Improve Compliance

CEO compensation governance is fast paced, and it can be seemingly impossible to stay ahead of the ever-changing industry trends. The industry tends to move so quickly that a seasoned executive may not even be aware that they are at risk for creating a Board that is non-compliant when creating dynamic incentive plans for the CEO and other key senior managers.

“Many classical models of CEO compensation consider only a single period, or multiple periods with a single terminal consumption. However, the optimal static contract may be ineffective in a dynamic world. In reality, securities given to incentivize the CEO may lose their power over time: if the firm value declines, options may fall out-of-the-money and bear little sensitivity to the stock price. The CEO may be able to engage in private saving, to achieve a higher future income than intended by the contract, in turn reducing his effort incentives. Single-period contracts can encourage the CEO to engage in short-termism/myopia, i.e., inflate the current stock price at the expense of long-run value. In addition to the above challenges, a dynamic setting provides opportunities to the firm, the firm can reward effort with future rather than current pay.” Alex Edmans, Xavier Gabaix, Tomasz Sadzik, and Yuliy Sannikov; Harvard University

Global Governance Advisors (GGA) provides a wide-ranging review and evaluation of board structure, director pay, governance policies and board performance. We also help to define and articulate each client’s organization compensation philosophy in terms of desired pay positioning, peer group, short and long-term compensation, performance management, succession, retention and recruiting strategies.

Global Governance Advisors works with its clients to address the challenge of creating and maintaining a compliant Board room, by helping Corporate Directors prioritize the following 4 Ps of Effective Corporate Governance:

1. Participation 

An impactful Corporate Director will foster an environment that encourages open dialogue between the Board and management and urges them to engage in human capital discussions. The dialogue and advancement of strong corporate governance is fundamental – not only to your bottom line for the next quarter, but to the long-term goals of your organization for many years to come. All in all, participation is needed to ensure that the Board and management are steadily collaborating to fulfil their compliance requirements.

2. Perception

It’s essential for a Corporate Director to understand his or her shareholders. To accomplish this, Corporate Directors need to work hand in hand with their IR and Corporate Secretary to efficiently monitor the institutional and retail shareholders along with advisory firm guideline changes.

3. Preparedness

Preparation breeds success. To maintain compliance, Corporate Directors must stay prepared and ahead of industry trends including shareholder perspectives, industry, capital markets and exchange rules.

4. Proactivity

Corporate Directors are responsible for completing an annual risk assessment, which includes the production of an annual work plan. Since compensation adjustments work in annual cycles, Corporate Directors need to carve out a sufficient amount of time to efficiently develop annual work plans, prior to the beginning of the new fiscal year. At a minimum, the work plan should reflect the compensation committees charter. To accomplish this, they need to appoint their compensation advisor early so that he or she has ample time to prepare preliminary drafts for the Chair’s review and schedule any pre-meetings. Compensation trends move relatively quickly, and an active advisor with access to deep resources can be invaluable to directors and help management get ahead of potential issues before they may arise.

Global Governance Advisors (GGA) is a top 5 North American Human Capital Management firm that services boards of directors and senior management by providing transformative Human Capital Management governance advisory services.

The Importance of Giving Back

by | Jul 5, 2018 | Philanthropy

A Life Lesson

Global Governance Advisors (GGA) considers giving back to our community as a core value of our corporate culture. The GGA staff identifies meaningful programs and partnerships that empower individuals living with developmental disabilities and youth in under-served communities. Our corporate philanthropy focuses on three areas:

  1. Promoting education for individuals with developmental disabilities.
    • GGA has donated a 10,000 square foot fully-equipped kitchen at the Inverrary Golf Resort to Florida International University (FIU) and their Hospitality Program. FIU will establish a Culinary Institute to train neurotypical and Autistic students as specialty chefs and hospitality personnel. The culinary institute will provide room service and meals for conferences and events at the hotel and keep 100% of the proceeds. FIU has committed to promote job creation for autistic young adults. The hotel will also employ Autistic adults from the FIU Embrace program.
  2. Empowering children.
    • GGA personnel have acted in senior leadership roles within Future Possibilities for Kids (“FPK”), a community-based organization that operates in the Greater Toronto Area. FPK works with children in under-served communities and helps them become leaders through the creation of meaningful Goals of Contribution to help their local communities.
  3. Providing family vacations for families with autistic children. 
    • In early 2012, GGA purchased its first vacation home in Sandestin, Florida to serve the needs of families living with autism. The GGA team raised $2 million for this initial residential property on Florida’s Emerald Coast that offers no-cost vacation stays to children with autism and their families. GGA Senior Partner, Luis Navas, has firsthand experience with autism, as his son developed a regressive form of the condition at age 2.  Mr. Navas describes his motivation for purchasing the Emerald Coast vacation house, which comfortably sleeps 14, as stemming from a conversation he had with a corporate CEO who had quietly contributed most of his income to charitable endeavors.

The Power of Board Assessments

by | Jul 5, 2018 | Board Dynamics, Governance

Board assessments are a powerful tool that can be used to evaluate the ongoing performance of your Board and ensure that you are following proper governance practices.

The board assessment process helps directors answer the important questions, such as:

  1. Do all directors understand the organization’s short and long-term strategies?
  2. Are directors and the executive team aligned on the organization’s strategy?
  3. Do directors understand the factors that drive the organization’s success, as well as the risk elements that can destroy value?
  4. Are there disputes or other issues between the directors and management, that impede smooth functioning of the Board?
  5. Do the Board and management understand their respective roles, so that there is clarity on both sides?

There are three types of board assessments:

Overall Board Assessments, Committee Assessments, and Peer Assessments. 98% of Boards assess their Overall Board performance, and over the past few years there has been an increase in the importance of Committee Evaluations and Peer Evaluations at 85% and 38% of Boards respectively, according to research conducted by Spencer Stuart. Organizations can also use the board assessment process to have directors reflect on their own performance, using self-evaluation questions, but this is less prevalent in the marketplace.

Board Assessments Continue to Evolve:

Evaluating your Board’s performance is a critical step in ensuring that you, as a director, are fulfilling your fiduciary duties. While this used to be done in a vacuum informally through individual one-on-one conversations between the Board Chair and individual directors, it has evolved into a much more robust process that involves post-meeting assessments, but also formal assessments of Board, Committee and Peer performance on a regular basis.

With the increased pressure and workload being placed on Boards of Directors in today’s marketplace, it is critical that you evaluate your Board’s performance on a regular basis. Regular board assessments can act as a powerful tool in identifying areas for continuous improvement to ensure that your Board is fulfilling its fiduciary obligations and ensuring the long-term sustainability of your organization.

Striving for Good Governance Should be Universal

by | Jul 5, 2018 | Board Dynamics, Governance, Leadership

There is a wide array of organizations that exist in the market place:

  • for-profit/not-for-profit
  • privately-owned/publicly traded
  • public sector/private sector

And unfortunately, with this variety, there tends to be a false assumption that there shouldn’t be a similar array of board governance standards.

The truth is that ALL Boards of Directors operate under the same three fiduciary duties:

  1. Loyalty;
  2. Prudence; and
  3. Impartiality.

Whether you sit on the Board of Alphabet, a charity, or your local condo board, ALL Boards must do their best to adhere to these same duties. Quite often, Board members suspect that because they are “only” on a board for a not-for-profit, start-up, small privately-owned company, etc. they don’t need to adhere to the same expectations/obligations of a larger, more complex organization.

Prudence is defined by Merriam-Webster as “the ability to govern and discipline oneself by the use of reason” which is why the “reasonable person” test is often applied to Board member actions whenever legal action is taken against them.

In any type of organization, Board members often know that there is, or should be, a better way to conduct their Board activities and complete their annual workplans, and it is fair to argue that in such cases, reasonable people should investigate what that improvement should be. Regardless of our level of skill or experience, all Board members experience a time when something doesn’t seem right or does not pass our personal “smell test.” What we often miss is that, if we feel that things could improve, there is a very high probability that there are others on our Board that feel the same way.

However, the identification of problems or shortcomings is a thing that we, as Board members, often shy away from because it requires us to either admit our own failings, the failings of our Board colleagues, or the failings of our entire Board. Whatever the issue, the duty of Prudence should compel us to act. But what is the best way for us to proceed without potentially embarrassing ourselves or our colleagues?

Board Effectiveness Assessments are a current governance best practice and an easy tool that Boards use to identify shortcomings, establish improvement plans, and track their progress. Board Effectiveness Assessments are annual board surveys that help Board members improve their collective ability to oversee their organization and ensure that they are prudently looking for ways to improve. Specifically, there are several benefits that Effectiveness Assessments provide:

  1. Understanding that most problems are often identified by more than one Board member. Collectively completing an effectiveness questionnaire enables members to collect views and opinions on Board practices and mutually identify areas where there are or could be problems.
  2. The surveys safeguard reputations and relationships because individual responses are often kept anonymous and aggregated with the other responses.
  3. Boards easily use the findings to establish proactive development plans that help them become more effective by improve shortcomings.
  4. Year over year results clearly show if a Board is making progress toward improving problematic areas.

If, for any reason, your Board has shied away from conducting such an assessment, or has not conducted one for a long while, the duty of prudence should compel us to ask “Why?” Regardless of the type of organization you oversee, the same fiduciary duties apply to ALL Boards, and ALL Boards should reasonably strive to be the most effective they can possibly be while fulfilling their Board duties.

Three Types of Board Assessments

by | Jul 5, 2018 | Board Dynamics, Governance, Leadership, Organizational Development

Board Assessments that Benefit an Organization’s Board Governance Practice

Board assessments can range in scope from simple, post Board meeting questionnaire of 5 to 10 questions on how to improve future meetings to detailed reviews at the end of the year that cover not only Board performance, but also director’s views on Committee performance and their peers’ performance. While organizations tended to conduct these types of assessments internally in the past, more and more organizations are relying on independent third parties to help them during the assessment with 45% of Boards reporting the use of consultants during their Board assessment, according to a recent Global Board survey, conducted by InterSearch and Board Network.

There are three types of Board Assessments that will benefit an organization’s board governance practices:

Overall Board Assessments

This is the most common assessment utilized by Boards and involves having directors evaluate the Board’s overall performance by asking questions relating to:

  • The Board’s overall understanding of organizational strategy
  • Director skills and competencies
  • Board Chair performance
  • The effectiveness of Board meetings
  • Board meeting materials and preparation time for meetings
  • Director relationships and collegiality
  • Director orientation

Typically, questions are provided with a 1 to 5 rating scale format and directors are given the chance to leave a  comment  where they may have evaluated performance at a low level (e.g. a rating of 1 or 2). Once the ratings from each director are consolidated, the range and average of ratings are generated for each question. From there, the Board is easily able to identify those areas where they have assessed performance as being weaker (i.e. Average Rating of 3 or lower) and is able to develop action plans to improve performance.

Committee Assessments

This is another common assessment utilized by Boards and involves having committee members evaluate the performance of the committees they participate in by asking questions relating to:

  • Committee Chair performance
  • The effectiveness of Committee meetings
  • Committee meeting materials and preparation time for meetings
  • Access to management and independent advisors

Like the Overall Board Assessment, a 1 to 5 rating scale questionnaire can be used to evaluate performance in these areas and, in turn, weaknesses can be identified and addressed through appropriate action plans to improve committee performance.

Peer Assessments

This is the least common assessment. Boards use it as a professional development exercise for directors and as part of the annual re-nomination and director selection process. Directors can evaluate their peers’ performance in several areas, including:

  • Meeting preparedness
  • Knowledge of the organization
  • Level of engagement
  • Understanding of their role
  • Collegiality and ability to work with other directors
  • Contribution to the Board

Peers can also be evaluated on a 1 to 5 rating scale using a questionnaire with directors who receive lower average ratings identified quite clearly. The evaluation can identify “problem” directors who can then be provided with the opportunity to improve their performance or resign well in advance of the re-nomination process.

Following Up on the Results of the Questionnaire

The most powerful used of the questionnaire is combing the results with individual follow-up interviews. The follow-up interviews can help the directors identify why they rated certain areas higher or lower and explore specific ways for the Board, Committees, and Peers to improve their performance. The feedback from these interviews must be kept confidential, with only the high-level themes of the interviews summarized. After the questionnaires and interviews are completed, boards can use the results to develop strong action plans that will establish specific ways in which performance can be improved.

GGA notes that communicating the results of the assessment (specifically peer evaluations) is a sensitive issue and typically is handled by either the Board Chair, Governance Committee Chair or an independent third party. Typically, the summary results are provided to the full Board, along with any action plans required to improve performance moving forward. Peer Assessment results are typically discussed individually with each director. Conversations with directors on their own performance are sensitive matters, so effective and diplomatic communication is required by whoever is delivering the feedback. They must identify existing areas of strength and contributions, so that they understand where they are already effective. When raising shortcomings, they must provide specific examples and keep comments constructive by avoiding personality-related comments. Most importantly, they cannot dodge the sensitive issues. Sensitive issues must be addressed for improvements to be made.

Five Critical Human Capital Management Questions

by | Jul 5, 2018 | Board Dynamics, Executive Compensation, Governance, Human Resources, Leadership

Questions Every Board Must Address

“Given the pace of business change today, companies increasingly need agile boards with the expertise to guide the company amid emerging threats and opportunities. And investors increasingly expect that boards will embrace rigorous practices to ensure they have the right expertise in the boardroom to respond to evolving market and competitive demands. The highest-performing boards will adopt a continuous improvement mindset, ensuring that their composition evolves in light of new strategic imperatives.” AESC.org

Global Governance Advisors (GGA) works with its clients to address the challenge of meeting these threats head on and taking advantage of the opportunities to gain a competitive edge by addressing five human capital management questions for boards of directors.

Five HCM Questions for Boards of Directors

How does your organization approach these five questions?

  • How can our board better impact the success of the organization?
  • Have we fostered an environment that encourages individual directors to think critically about their contributions and the relevance of their skills to the company strategy?
  • Are we using our annual board assessment and regular executive sessions to assess the culture and dynamics in the boardroom and identify ways to operate more effectively?
  • Does our board have a platform to analyze and scorecard senior management compensation plans?
  • Does our board have access to an oversight vehicle for shareholder engagement activity that makes valuable information readily available to the board – in real time?

GGA’s offers a unique approach of weaving together a blend of services that address board productivity, governance and develop Senior Management compensation (incentive) plans to deliver outcomes that align with company goals.

Defining Board and Management Responsibilities

by | Jul 5, 2018 | Board Dynamics, Governance, Leadership, Meeting Effectiveness

Making Sense of Your Role

To ensure good governance practices, Board members must acknowledge and adhere to three primary fiduciary duties, which was the message that I recently delivered in education sessions to public pension plan trustees and board members for not-for-profit organizations.

  1. Duty of Loyalty;
  2. Duty of Prudence; and
  3. Duty of Impartiality.

Part of making sure that you are fulfilling your primary fiduciary duties is to make sure that you and your Board are following proper operating processes. As has been said many times by governance and legal experts, you cannot be sued for the decisions you make as a Board, but you can be sued for not following proper processes in making your decisions.

One key problem area for boards of all sizes, in all industries, is the separation of roles between the Board and management. Often boards get too far down into the weeds on operational issues that can be better delegated to management and, as a result, do not spend the necessary time focusing on the important strategic issues facing the organization. This pattern of behavior can lead to several negative outcomes, including:

  • The loss of influence of your Top Executive over implementation and operational decisions, which can ultimately hurt them in commanding the respect of other senior staff members.
  • Friction between the Top Executive and the Board that ultimately leads to a lack of trust on both sides.
  • Potential loss of key talent due to the dysfunction between the Board and management.

The common mantra in governance circles is for boards to have their “nose in and fingers out,” which refers to a board’s obligation to be on top of all governance matters, but to not stray down into trying to manage the day-to-day operations of the organization. In recent years, a new term: “nose in and fingers on the pulse” has emerged. This describes a board that succeeds by playing a role in overseeing the execution of the strategic vision, while simultaneously keeping on top of strategic developments that will affect the organization. In either case, it is important that Board and management have a clear understanding of their responsibilities, which starts with identifying situations where the Board is being over-active and straying too far down into management issues.

Signs of an Over-Active Board

Four ways to spot an over-active board

  1. Too much time is spent in Board meetings discussing operational issues.
  2. Board meetings are constantly running behind schedule.
  3. Your Top Executive’s relationship with the Board is strained.
  4. You find yourself, as a Board confused, over your responsibilities vs. management’s.

If you spot any of these situations you need to discuss your concerns with your fellow Board members, as well as management, to see how you can improve.

Starting points to consider when delineating between Board and management responsibilities

Common Board Responsibilities

  1. Review and approve annual and long-term objectives for the organization.
  2. Review and approve policies and procedures that govern the organization.
  3. Review and approve strategic plan and annual operating budget.
  4. Hiring, firing and compensation for the Top Executive.
  5. Provide direction and strategic input to the Top Executive and management.
  6. Monitoring performance and risk of the organization.
  7. Setting and approving the organization’s overall Board governance framework.
  8. Review and approve required public disclosure documents.

Common Management Responsibilities

  1. Initial formulation of annual and long-term objectives for the organization.
  2. Initial formulation of policies and procedures that govern the organization.
  3. Prepare Board reports and draft annual operating budget.
  4. Provide continuous input into the strategic plan of the organization.
  5. Hiring, firing and compensation for staff below the Top Executive.
  6. Managing risk and monitoring performance of the organization.
  7. Preparation of required public disclosure documents for the Board’s review.
  8. Run the day-to-day operations of the organization.

Real-World Application

Let us consider the responsibilities of the Board and management as it relates to setting the annual operating budget. In this case, it is management’s role to develop the budget by considering all the potential areas to allocate funds on while balancing that with consideration of the fiscal constraints that the organization faces. Management must also draft the budget quickly enough so that the Board has adequate time to review and ask questions about the budget before it needs to be finalized. Once the budget is drafted and presented to the Board, by management, it is the Board’s role to ask management good questions about the assumptions, omissions and estimates used to draft the budget.

The following are types of questions that the Board should ask at a strategic, not granular, level to better understand the budget and ultimately be able to approve it. Please note that the Board should not be asking questions on every single line item of the budget.

  • What did management consider including, but ultimately decide to exclude from the budget and what was their rationale?
  • What is the impact on the budget if a certain estimate is missed?
  • What are the key variables that will impact the organization’s ability to meet the budget?

Ultimately, better defined roles lead to a positive working relationship between the Board and management, which should lead to better decision-making, a collaborative approach to solving issues, candor in speaking about difficult issues and a high level of trust on both sides.

We all desire clarity in our day-to-day lives, why shouldn’t we ask for it in the Boardroom as well?

ISS Proxy Voting Guidelines Updates 2017

by | Nov 27, 2017 | Canada, Governance, ISS, Proxy Guidelines

What do these updates mean for Canada?

Last week, ISS released the 2018 Americas Proxy Voting Guidelines Updates, detailing policy changes for U.S, Canada and Brazil.

Changes for Canada

Pay for Performance Evaluation – Relative Quantitative Screening

Now incorporates the ranking of total pay for CEO and financial performance of a company within a peer group, each measured over a three-year period within the Relative Pay & Performance test under Quantitative considerations. A detailed white paper will be provided at a later date.

Director Overboarding Policy

(effective for meetings on or after February 1, 2019 for TSX-listed companies only. Does not apply to TSX Venture)

Withhold votes for individual director nominees including:

  • Non-CEO directors serving on more than five public company boards; or
  • CEOs of public companies serving on the board of more than two public companies besides their own, i.e., votes to be withheld only at their outside boards.

Gender Diversity Policy

(effective for TSX Composite Index companies starting 2018. Applies to all TSX-listed companies starting February 2019)

  • Withhold votes for the Chair of the Nominating Committee where:
    • The company has not disclosed a formal written gender diversity policy; and
    • There are zero female directors on the board.

Board Structure & Independence (TSX only)

New language has been added relating to votes withheld for any Executive Director or Non-Independent, Non-Executive Director where the board:

  • Is less than majority independent; or
  • Lacks a separate compensation or nominating committee.

Non-Independent Directors on Key Committees for TSX-listed companies

Withhold votes for members of the audit, compensation, or nominating committees who:

  • Are Executive Directors;
  • Are Controlling Shareholders; or
  • Is a Non-employee officer of the company or its affiliates and among the five most highly compensated.

Non-Independent Directors on Key Committees for TSX Venture companies

Withhold votes for Executive Directors, Controlling Shareholders or a Non-employee officer of the company or its affiliates who is among the five most highly compensated, on condition that they:

  • Are members of the audit committee;
  • Are members of the compensation committee or the nominating committee and the committee is not majority independent; or
  • Are board members where the entire board fulfills the role of a compensation committee or a nominating committee and the board is not majority independent.
ISS also made certain modifications to their policy on defining Director Independence, i.e. re-classification of certain situations under different categories, Majority-Owned Company policies and Advance Notice requirements.
For more information, please refer to the link above.

GGA’s Seventh Annual CEO Pay for Performance Survey with Globe and Mail

by | Jun 13, 2017 | Executive Compensation, Governance, Research, Survey

GGA and the Globe and Mail partnered once again to present our seventh annual ranking of CEO Compensation for the top 100 largest public companies in Canada’s S&P/TSX composite index.

Full results here.

There’s more behind the final tally. The compensation of CEOs is made up of various components. GGA and the Globe and Mail analysed the compensation for the top 100 CEOs in Canada and broke it down by pay, share ownership, untapped wealth, cash bonus and equity grants.

You can view our findings here.

Our top 100 CEO Compensation ranking shows that equity grants have become a major reason why CEO pay is climbing in Canada. The Globe and Mail’s Janet Mcfarland examines the reaction from major shareholders, who are increasingly growing frustrated with the way companies are offering share units as a major part of CEO pay.

Full analysis here.

And there is more. Paul Gryglewicz in a recent BNN interview, discussed our top 100 CEO Compensation study, including key insights for shareholders, and what boards should consider when developing a CEO compensation package in today’s business environment.

Full interview here.