Note: All references to directors also include trustees at income trusts. All references to shares also include units of income trusts.
Board Games Methodology 2012
All companies, corporations and income trusts
Board Composition: worth 31 marks out of 100
1. What percentage of the company’s directors are fully independent? That means directors who are not management, relatives of management, former members of management within the previous five years, or people whose firms do business with the company – including, for example, lawyers, accountants, suppliers, consultants or investment bankers. Board Games also marks as related those directors who are controlling shareholders of the company or who work for a parent company that controls the public subsidiary. Four marks for boards with at least two-thirds independents. Two marks if more than 50 per cent of directors are independent. Zero marks if there is a majority of related directors.
2. What percentage of the audit committee is fully independent? Three marks if the committee is fully independent. One mark if there are one or more related directors who are not management. Zero marks if a member of management is on the committee.
3. What percentage of the compensation committee – the committee that determines executive pay – is fully independent? Two marks if the committee is fully independent. One mark if there are one or more related directors who are not management. Zero marks if a member of management is on the committee or if there is no committee.
4. What percentage of the nominating committee – the committee responsible for recommending new directors to join the board – is fully independent? Two marks if the committee is fully independent. One mark if there are one or more related directors who are not management. Zero marks if a member of management is on the committee or if there is no committee.
5. Is the role of chairperson and CEO split? Four marks if the roles are split and there is a fully independent chairperson. Two marks if they are split, but the chairperson is a related director. One mark if they are split, but the chairperson is a member of management. Zero marks if the roles are not split. (Note: There is no longer credit for not splitting the roles but having a lead director.)
6. a) Do two or more directors sit together on two or more other boards of publicly traded companies, creating the potential for a close-knit bloc of directors? Or, do three or more directors sit on any other corporate board? One mark if no, zero if yes.
6. b) Do any directors sit on five or more S&P/TSX company boards? One mark if no, zero if yes.
7. Are there any women on the board? Four marks if at least 33 per cent of directors are women. Two marks if 25 per cent to 33 per cent of the board are women. One mark if there is at least one woman on the board. Zero marks if there are no women.
8. Does the board have a system to evaluate its performance? Three marks if there is a formal board evaluation and a formal individual director evaluation including peer review, with detailed disclosure of what sort of process is used for both. Two marks if there is a formal board evaluation and director evaluation, but no peer review. Also two marks if the company has a formal peer review process but does not mention or describe any board or committee review process. One mark if there is a formal board assessment, but not an assessment of individual directors, or if there is reference to a director assessment but not board or committee review. Zero marks if there is no evaluation or there is only vague description of how the assessment is done with no details of the process used.
9. Do independent directors meet without management? Three marks if they meet without management at every board meeting. Two marks if they meet without management at regular board meetings, but not all board meetings. One mark if they meet sometimes, but not every regular board meeting. Zero marks if there is no mention or if there are no meetings without management. Also zero marks if the company uses vague wording – for example, that “time is available for in-camera meetings” – that do not specify whether the meetings are actually held.
10. Does the company disclose the process the board uses to manage succession planning for the CEO’s job? Disclosure must go beyond simply noting that the board or one of its committees is responsible for managing succession planning. There must be evidence a formal process is in place, and some detail of how the board approaches the task must be given. Two marks if yes, zero if no.
11. Does the company provide information about its director education processes for the year, and is there evidence that a formal process is in place? This could include information about educational events offered to the entire board during the year, site visits to company facilities by directors, or specifics about special briefings, courses or training offered to some or all directors. If the company fully describes education processes, lists training sessions held in the prior year and identifies which directors attended, two marks. If the company gives a full description of education processes but leaves out some details about events and who attended, one mark.
Shareholding and compensation: worth 26 marks out of 100
12. a) Are directors required to own shares or share units? (Stock options don’t count.) Four marks if the requirement is equal to at least three times the retainer paid to directors – including the value of grants of shares or share units. Two marks if there is a requirement, but it is lower than three times the value of the retainer and share units. Zero marks if there is no requirement.
12. b) How many shares do directors own? Four marks maximum, but minus one mark for each director who owns less than three times the annual retainer plus the value of grants of shares, share units or options. If a director has been on the board less than one year, the ownership requirement does not apply. If a director has been on the board one to two years, the required ownership level is reduced to one times the retainer and share units.
13. a) Is the CEO required to own shares? (Stock options don’t count.) Two marks if there is a requirement to own at least three times the base salary, or if the CEO is the company’s controlling shareholder. One mark if there is a requirement to own one to two times the base salary. Zero marks if there is no requirement or if the requirement is less than one times the base salary.
13. b) Does the CEO own shares? Three marks if the CEO owns shares worth at least triple his or her base salary. Two marks if the CEO owns shares worth at least double his or her base salary. One mark if the CEO owns one to two times his or her base salary. Zero marks if the CEO owns shares worth less than one times his or her base salary. No ownership rule for CEOs on the job for less than one year.
14. a) How well does the company disclose the compensation policies it applies when deciding CEO bonuses? Does it provide a percentage weighting of the factors that are considered in determining the CEO’s bonus? One mark if yes, zero if no.
14. b) Does the company provide details of the specific target amounts that have to be achieved in each area? Two marks if all target specifics are given, one mark if targets are given but all specifics are not provided. Zero if no target details are provided.
14. c) Does the company explain the outcome of what actually happened with the performance goals and how the outcome affected the CEO’s bonus? One mark if yes, zero if no.
15. a) Does the company disclose whether or not cash bonus or performance share unit plan payouts are based on performance relative to a peer group of similar companies? This means compensation is affected by a company’s comparative performance and not just improvements in absolute terms, addressing concerns that executives can underperform their peers but be paid a bonus for better results that are due to external economic factors. If the company ONLY uses a peer group for benchmarking general pay levels and not performance-based pay levels, no points will be given. One mark if yes, zero if no.
15. b) Does the company disclose the composition of the peer group it uses for performance benchmarking? If the company ONLY uses a peer group for benchmarking general pay levels and not performance-based pay levels, no points will be given. One mark if yes, zero if no or if no peer group is used.
15. c) Does the company explain the rationale for the peer group it has chosen for performance benchmarking? For example, a company might say peer group members are similar-sized companies or operate in the same industry or have similar business characteristics. If the company ONLY uses a peer group for benchmarking general pay levels and not performance-based pay levels, no points will be given unless a rationale is provided. One mark if yes to either, zero marks if no.
16. Are there performance hurdles for stock options or share units, beyond simply requiring the share price to rise over time? One mark if yes, zero if no.
17. Does the company disclose the total value of the CEO’s accumulated shares, DSUs or other equity holdings? (The company must provide the value, and not just number of units held.) Two marks if yes, zero if no.
18. Does the company disclose the gains reaped by executives from exercising stock options over the prior year? Two marks if yes, zero if no.
19. Does the company disclose the total cost of compensation to the top executive team as a percentage of the total profit or total shareholder return for the year, or does the company include a table or graph that compares total executive compensation to financial performance over at least three years? One mark if yes, zero if no.
Shareholder rights: worth 31 marks out of 100
20. a) Does the company allow shareholders to vote for individual directors, or only the entire slate of nominees? Three marks if there is voting for individual directors with clear options beside each director’s name. One mark if investors must cross out or write in the names of directors for whom they are not voting. Zero marks if there is only slate voting.
20. b) Does the company have a majority voting policy, asking directors to resign if they do not receive a majority of votes in support? Three marks if yes, zero if no.
20. c) Does the company give shareholders an advisory vote on executive compensation (known as say-on-pay)? Two marks if yes, zero if no.
20. d) Does the company report its annual voting results for each item on the proxy, including the number or percentage of shares voted on each matter? One mark if yes, zero if no. (Note: It must be clear how many votes were cast both “for” and “withheld” either by giving both numbers, or by giving “for” and the total number of votes cast. Just disclosing the “for” vote alone without context is not sufficient.)
21. Does the company disclose it has a provision to “claw back” bonus payments to the CEO if wrongdoing is discovered late? One mark if yes, zero if no.
22. Does the company have a holding period for shares after a CEO leaves the company to ensure there is a performance “tail” to the CEO’s work? This is an incentive to make good long-term decisions prior to departure. One mark if yes, zero if no.
23. a) Are stock options excessively dilutive? Dilution is based on the number of options outstanding at the company’s fiscal year-end as well as the number of options approved for future issuance, expressed as a percentage of all shares outstanding. Where the company has more than one class of shares, dilution is measured for whichever class of shares is diluted by the outstanding options.
Two marks if the dilution is less than 5 per cent of outstanding shares, or if the company has no option plan. One mark if the dilution is between 5 per cent and 8 per cent of outstanding shares. Zero marks if the dilution is over 8 per cent. Zero marks if the company has adopted an evergreen option plan that automatically “reloads” the number of options available for issuance – even if the option dilution level falls within the guidelines listed above. And zero marks if the company has re-priced any of its options within the prior year.
23. b) Is the annual stock option grant rate excessive? Two marks if the number of options granted in the prior fiscal year was less than 1 per cent of all shares outstanding. One mark if the grant rate was between 1 per cent to 1.49 per cent. Zero marks if the grant rate exceeded 1.5 per cent annually.
23. c) Is there a vesting period before options can be exercised? Three marks if yes. Zero marks if some options vest in less than 12 months after issuance, including director options.
24. a) Does the company calculate and display the year-end dilution level of stock options as a percentage of shares outstanding? One mark if yes, zero if no.
24. b) Does the company calculate and display the prior year’s grant rate for option grants as a percentage of shares outstanding? One mark if yes, zero if no.
25. Does the company award stock options to directors? One mark if no, zero if yes.
26. Are there non-voting or subordinate voting shares? Ten marks if there are no dual-class shares. Marks are reduced depending on the gap between the percentage of votes controlled by the superior voting shares and the percentage of the company’s equity they represent, using the following guidelines: Four marks if the ratio is less than 3:1. Three marks if the ratio is between 3:1 and 4:1. Two marks if the ratio is between 4:1 and 5:1. Zero marks if the ratio is 5:1 or worse.
If the company has no dual-class shares, BUT has other unequal voting rights, use the following two-part marking scheme instead of the above:
Can shareholders elect the whole board, or are some directors appointed (by a shareholder or manager, for example) so that their names don’t appear on the proxy ballot? Five marks if all are elected, three marks if one director is appointed and not elected, two marks if more than one is appointed if not a majority, zero marks if a majority are appointed and not elected.
Does any party – an administrator, manager or shareholder, for example – have rights unequal to ownership? Can any party nominate directors out of proportion to ownership? Can anyone veto key issues – such as changes to senior management, or assets sales and purchases – without owning a majority of the shares? Five marks if all rights are equal, three marks if a party has disproportionate rights compared with ownership stake, zero marks if a party has rights that have little or no relationship to ownership stake.
Disclosure: worth 12 marks out of 100
27. Does the company provide a full explanation of which directors are related and unrelated and why? One mark if full disclosure, and if the disclosure is included in the part of the proxy circular where companies disclose which directors on the board are related or unrelated. Zero marks if company does not disclose a director’s relationship in the proxy circular.
28. a) Does the company disclose detailed biographies to explain directors’ qualifications to represent shareholders? Does the biography demonstrate why this director is a good candidate for election? Relevant information might include educational background, non-profit affiliations, industry experience, career highlights or special achievements. One mark if yes, zero marks if not.
28. b) Does the proxy circular specify the skills or areas of expertise of each director in the form of a “skills matrix” or in another format? The details must be explicitly laid out – it is not adequate to assume they can be inferred by reading a basic biography. One mark if yes, zero if no.
29. Did directors attend all meetings, and does the company remove directors with poor attendance? Two marks if all board and committee meeting attendance is disclosed and board members attended at least three-quarters of board and committee meetings. One mark if any board member has missed more than one-quarter of meetings and is not put up for re-election. Zero marks if committee attendance is not disclosed, or if a board member or a committee member missed more than one-quarter of meetings and is put up for re-election.
30. a) Does the company disclose the total accumulated value (a dollar amount, not just number of units held) of directors’ equity holdings, including shares and share units? Two marks if yes, zero if no.
30. b) Does the company explain how each director’s share ownership meets (or fails to meet) the required share ownership guideline? For example, does the equity ownership chart include a column showing how the ownership compares to the requirement as a percentage, multiple or dollar value compared to the requirement? One mark if yes, zero if no. Zero if there is no ownership requirement.
31. a) Does the company disclose the dollar value of fees paid to an outside compensation consultant? One mark if yes or if no consultant was used, zero if no.
31. b) Does the company disclose whether the compensation consultant provided any other services in the prior year, and, if so, how much money was paid for the other services? One mark if yes or if no consultant was used, zero marks if no.
32. a) Does the company disclose directors’ ages? One mark if yes, zero marks if no.
32. b) Does the company disclose whether or not it has a retirement policy for directors, and what the details of the policy are? One mark if yes, or if company states it has no retirement policy for its directors. Zero marks if no disclosure.