Many investors say they want corporate directors to own a significant number of shares to align their thinking with other shareholders. Director share ownership levels are soaring as a result, boosted by the escalating use of director share unit plans and the spread of mandatory share ownership rules.
How high can they go?
It isn't uncommon for directors today to own many millions of dollars worth of their companies' shares. Most governance experts applaud this trend, saying it aligns interests with those of investors. But a small number of voices are beginning to question whether it can go too far. Board consultant Patrick O'Callaghan reported early this year that the value of shares or share units granted to directors had climbed 41 per cent from the previous year. "The new question is, 'How much is too much?' " Mr. O'Callaghan asked. "At what point does a director lose his or her independence because director fees are so significant a director may be reluctant to rock the boat?"
Example: Canadian National Railway Co.
At CN Rail, no director on the board owns less than $1-million in shares, due in part to the company's practice of paying directors almost entirely in shares. Last year, CN's basic cash retainer was $10,000 (U.S.), but each director also got 4,500 shares worth more than $140,000. Many directors on the board have amassed large stakes in the company. Chairman David McLean owned $7.2-million (Canadian) in shares when the company issued its shareholder circular earlier this year, while director Purdy Crawford owned almost $6-million.
Can it go too far?
Some companies are awarding such large amounts of equity-based compensation to directors that it is pushing their annual compensation to huge levels. The pay is out of line with any industry norms, and it is questionable whether it is justified simply because a company wants to help boost directors' ownership stakes. At Trican Well Service Ltd., directors are paid a standard base retainer of $13,000 a year, but last year they also got share units worth $252,000 on Dec. 31 -- giving them an annual pay level that is higher than almost any other company.
Example: Yamana Gold Inc.
Directors on Yamana's board are paid a modest $20,000 a year as a cash retainer. But earlier this year, the independent directors on the board approved giving themselves 1.5 million stock options -- on top of 780,000 granted last year. An analysis by shareholder rights advocate ISS Canada concluded the 2006 options were worth $5.3-million, or more than $1-million per director. Yamana said the grants were made to recognize directors' contribution to the growth of the firm into an intermediate producer. But shareholder advocates complained, and last week the firm disclosed it will not grant further director options.
A Report on Business review of 204 large corporations in the S&P/TSX index found 69 per cent now have share ownership requirements for their directors, while 31 per cent leave it up to the individuals to decide whether to put their own money on the line. Income trusts are far worse, with only 22 per cent of 69 trusts analyzed having a mandatory ownership rule. This means many companies and trusts have not put an emphasis on share ownership by directors, and the result is often predictable -- their directors own few shares.
Example: Cardiome Pharma Corp.
Cardiome has seven directors on its board, and five of them owned no shares at all when the company issued its proxy circular this spring. That's a dismal track record even among companies without a director share ownership requirement. While one of the directors has only been on the board for a year, the others have been directors for up to four years without buying a share. Fred Mermelstein, president of Javelin Pharmaceuticals Inc., is the exception. He is the only independent director to own any shares -- and he held a whopping $9.1-million worth as of May 3.
