Canadian investors will soon learn far more about executive pay packages as regulators prepare to revise compensation disclosure rules introduced more than a decade ago.
The Canadian Securities Administrators (CSA), an umbrella group representing provincial securities commissions, expects to have a new set of rules ready early next year, requiring full disclosure of virtually every detail of executive compensation.
The key change will be a requirement to tally up the total value of all compensation in a chart, including the cash value of all stock options and share units granted to executives in the prior year, as well as the value of their pension gains.
It will be accompanied by an expanded "narrative statement" explaining how the board arrived at each compensation element.
Pay for directors will also have to be totalled on a similar chart.
Ontario Securities Commission chairman David Wilson said it has been 12 years since compensation disclosure has been reformed, and it is time to modernize practices.
"The disclosure regime is kind of long in the tooth. .ƒ|.ƒ|. The world has evolved," he said.
The Canadian standards will duplicate many of the key rules introduced this summer by the U.S. Securities and Exchange Commission in its sweeping 436-page package of compensation disclosure rules.
While the U.S. standards have generated huge controversy, the Canadian rules may look familiar by the time they appear. That's because many of the new standards have already been voluntarily adopted by some leading Canadian companies, pushed by an active lobbying effort by the Canadian Coalition for Good Governance (CCGG), a shareholder coalition.
For example, ROB found that 40 companies and trusts in the benchmark S&P/TSX index now publish a chart tallying the total of all elements of executive compensation, including the estimated value of stock-option grants. And 97 of them publish a chart disclosing the cash value of compensation paid to directors in the previous year.
Other disclosure trends are also catching on: Twenty-seven companies reported the cash value of all shares owned by their CEOs — giving investors a sense of their "skin in the game," as the CCGG has called it — and 33 companies disclosed the dollar value of all their directors' share holdings.
"It really is one of those 'the-train-has-left-the-station' things," said John Hughes, the OSC's manager of corporate finance who is heading the CSA committee drafting Canada's new disclosure rules.
Mr. Hughes said some of the most controversial elements of the new U.S. standards are still under review and may not be duplicated in Canada. They include a proposal — still not finalized in the U.S. rules — to disclose the pay of non-executive employees if it is higher than the pay of any top executives, as well as a requirement to provide full details of any perks given to executives if they are worth more than $10,000 a year.
The CSA hopes to publish its proposed rules for comment early next year, with a view to implementing them by the end of 2007.
Manulife Financial Corp. chairman Arthur Sawchuk said he has no problem with new disclosure rules, but he draws the line at detailing all executive perks because it will become "a gossip sheet."
Mr. Sawchuk said Canada needs its own rules to standardize disclosure because some information being disclosed, such as pension benefits for CEOs, is calculated and disclosed differently by various companies.
"It needs some more rigid structure in the format, so you can make comparisons between one company and another — or, for that matter, to understand it," he said in an interview. "What we are doing now, that just leads to a dog's breakfast of a variety of things."
Sun Life Financial Inc. chairman Ronald Osborne, whose company also already discloses extensive compensation details, said the SEC's standards are "too prescriptive." He said he hopes Canada's new standards will not be as detailed.
"The risk of all these trends is that on some occasions you go overboard and you create more fog than clarity," he said. "We have tried to avoid that, and I think we have."
Mr. Osborne said the CCGG was the catalyst for Sun Life to introduce many of its new compensation disclosure standards.
The coalition has drafted several booklets outlining preferred "best practices" in disclosure, including one coming soon on executive compensation disclosure.
"It has been a series of documents that I think establish a set of standards where there was none," says CCGG managing director David Beatty.
He said the coalition, which represents 50 large institutional investors, has decided to focus on disclosure in the hope it will ultimately lead to better underlying practices.
"If they stop and think about what's being disclosed, they might stop and think about what they do," he said.
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