News

On a recent tour of a sock factory in Honduras, Bob Baylis was delighted to see egrets and herons wading in a lake on property owned by Gildan Activewear Inc. The small lake was picturesque proof of the successful operation of a series of leaching pools designed to clean dye-filled water.

“There were some birds they hadn't seen for a long time in the area that came back because the water was so good in the pool and there was now fish in the pool,” Mr. Baylis said in a recent interview.

The Gildan chairman was leading his directors on a tour to see how the company's largest sock manufacturing facility in Honduras was treating its employees, and the local environment – including the dirty water emitted in the manufacturing process.

“That's a process which is not a simple manufacturing process that you would ordinarily be familiar with, so it's important to go see it,” he said. “It's important for the board to do the due diligence to see that we've done all that – and that it's working.”

The journey to Honduras was the third such trip taken by the board in recent years to survey the firm's far-flung operations in Central America and the Caribbean. Globe-trotting is just one part of the active oversight Mr. Baylis is promoting for the board of the Montreal-based clothing manufacturer.

Six years ago, when The Globe and Mail launched its Board Games rating of corporate governance practices, Gildan scored 50 out of 100 – a bare passing mark. This year, with far tougher marking standards now used in the survey, Gildan scored 96 out of 100, second only to perennially top-ranked Manulife Financial Corp.

Few companies have moved as dramatically up the Board Games ranks as Gildan, a rare manufacturer to join the top tier, which is dominated by banks, insurers and other companies long recognized for leading governance practices.

“The financial companies make such a large issue of governance that they all do very well – it's almost their private contest,” Mr. Baylis said. “But there are several manufacturing companies that have made an effort.”

It's no coincidence that Gildan's governance evolution in recent years has paralleled the company's business evolution, with manufacturing of its textiles now fully moved to offshore locations to take advantage of lower costs.

Mr. Baylis said the board has realized that the greater distance also means far greater risks, especially in terms of damage to the company's reputation if labour or environmental conditions are subpar. The company faced major criticisms from labour groups for allegedly abusive treatment of workers in Honduras between 2002 and 2004, prompting Gildan to announce a series of measures to assist employees in that country.

“It seems important for us to stress some of the governance issues and work hard at it because we do manufacture in many other parts of the world, and there's always this question of ‘When you're far away, are you doing the right things?'” Mr. Baylis said.

“And of course some people haven't, particularly in the textile business. So we've decided we have to bend over backwards the other way.”

And so it has. In most major areas of board governance – from board independence to disclosure to compensation policies and shareholder rights – Gildan has transformed its governance practices in a few short years to adopt gold-standard practices.

A key step came in 2004 when Gildan co-founders Greg and Glenn Chamandy and Edwin Tisch decided to do away with their multiple voting shares, converting them into subordinate voting shares.

Shortly afterward, Greg Chamandy and Mr. Tisch essentially sold almost all their stock in an equity monetization deal. Mr. Chamandy also stepped down as chairman and co-chief executive officer of the company. Since that major restructuring, Glenn Chamandy has remained with Gildan as CEO, holding about 6.6 per cent of Gildan's shares.

When Greg left the company in 2004, Mr. Baylis said there was no hesitation to appoint an independent chairman to take his place. And as lead director, he was the obvious candidate to take over the job, bringing years of board experience as the former vice-chairman of Credit Suisse First Boston. He is also a director of PartnerRe Ltd., New York Life Insurance Co., Host Hotels & Resorts Inc. and drug developer Covance Inc.

“We had already made quite a thing about saying that even though we have a chairman, we were going to have a lead director,” he said. “So to have Greg leave and to say we didn't need a chairman didn't seem like a good idea.” Since then, the firm has also added several new directors to its seven-member board, making the board more independent from management and giving it a broader range of backgrounds.

“We like having a small board, so we like to think carefully about what skills each of us bring to the meetings,” he says. The result has been that Gildan's marks in the category of board composition moved from 27 out of 40 in 2002 to 35 out of 37 in 2007.

The company's marks for shareholder rights practices have also changed dramatically, moving to 27 out of 28 this year – up from nine out of 22 in 2002 – thanks not only to the elimination of dual-class shares, but also by allowing shareholders to vote for each individual director rather than the board as a whole. Gildan has also introduced a new majority-voting requirement, requiring directors to submit their resignations if they don't win at least 50-per-cent voting support from shareholders.

“I believe that it's a fair, democratic way of electing the directors,” Mr. Baylis said.

Gildan has also made changes to its executive compensation practices, using far fewer stock options and lowering the potential dilution for investors. The firm has made more use of restricted share units as an alternative in recent years. “What you're really trying to do is gear people to have an interest in the stock and feel they're tied in with the shareholder, so that's why you want to have some way of making sure they own stock,” Mr. Baylis said.

Gildan has also eliminated the use of stock options to compensate directors, and now requires directors to own at least $150,000 (U.S.) worth of shares – a practice Mr. Baylis said he insists on for directors on all his corporate boards. The result of these changes is that the company's compensation mark has moved to 25 out of 25, up from 10 out of 23 in 2002.