For the 21st year in a row, Report on Business has rated the work of Canada’s corporate boards using a rigorous set of governance criteria designed to go far beyond minimum mandatory rules imposed by regulators.
The Globe and Mail’s data partner, Global Governance Advisors, examined the boards of directors of 226 companies and trusts in the S&P/TSX Composite Index to assess the quality of their governance practices and disclosure.
The chart shows the total marks for 2022 and 2021 based on dozens of individual criteria across four broad subcategories. For more explanation on the ranking and how the questions changed from 2021 to 2022, please see Board Games 2022: How we ranked Canada’s corporate boards.
Board Games Methodology for 2022
Board Composition, questions 1 through 10, worth 40 marks out of 100
1. What percentage of the company’s directors are fully independent?
SEVEN marks for boards with at least two-thirds of independent directors. THREE marks if more than 50 per cent of directors are independent. ZERO marks if there is a majority of non-independent or related directors.
For a Director to qualify as independent as measured for this question, the director must have no links to the company beyond their role as a director. That means that they are not:
· executives/employees;
· relatives of executives/CEO;
· executives/employees for a parent/sister/subsidiary company that controls the company;
· former members of management at the company or parent/sister/subsidiary company within the previous five (5) years;
· people whose firms do business with the company regardless of compensation amount including, for example, lawyers, accountants, suppliers, consultants/advisers or investment bankers;
· paid extra compensation by the company for providing non-board services, such as consulting work.
· controlling shareholders or related to the controlling shareholder of the company.
2. Is the role of chair and CEO split?
FOUR marks if the roles are split and there is a fully independent chair. TWO marks if they are split, but the chair is a related director. ONE mark if they are split, but the chair is a member of management. ZERO marks if the roles are not split. Any company with fewer than full marks will receive ONE additional mark if there is a lead independent director on the board.
3. (a) Does the CEO sit on the boards of more than one other publicly-traded company that is not a related company?
ONE mark if no, ZERO if yes.
3. (b) Do any directors sit on four or more public company boards?
ONE mark if no, ZERO if yes.
4. (a) Does the board have gender diversity?
FOUR marks if more than 33 per cent of directors are women. TWO marks if 25 to 33 per cent of the board are women. ONE mark if two members of the board are women, regardless of proportion. ZERO marks if there are one or no women on the board.
4. (b) Does the company describe how it considers the representation of women for the board of directors?
THREE marks if the company discloses details of its policy and includes an internal target for the proportion of women on the board with specifics of the target details and a timeline for achieving the target. ONE mark if the company discloses details of a process used to consider the representation of women on the board, such as recruitment practices aimed at ensuring female candidates are considered for board seats, but doesn’t have a target or doesn’t disclose a timeline for achieving a target. ZERO marks if the company doesn’t have a diversity policy or doesn’t describe specific steps it takes to ensure gender diversity is reflected in recruitment. That means zero marks if a policy mentions several types of diversity without disclosing any specific measures related to improving gender diversity.
Note: Companies that have a target and have already met it do not have to have a timeline for achieving their target. Also, companies with at least 40 per cent women on the board will receive three marks even if they have not adopted a formal diversity target.
5. (a) Does the company disclose how it is diverse in ways other than gender?
FOUR marks if a company discloses it has more than one board member who self-identifies as Indigenous, a member of a visible minority, has a disability, or is LGBTQ+ and specifies which groups the members belong to. THREE marks if a company discloses it has more than one board member who self-identifies as Indigenous, a member of a visible minority, has a disability, or is LGBTQ+ but does not specify which groups the members belong to. TWO marks if a company discloses it has one board member who self-identifies as Indigenous, a member of a visible minority, has a disability, or is LGBTQ+ and specifies which group the member belongs to. ONE mark if a company discloses it has one board member who self-identifies as Indigenous, a member of a visible minority, has a disability, or is LGBTQ+ but does not specify which group the member belongs to. In identifying specific groups, the company may use a narrative or a board diversity matrix. The company does not need to name the specific directors in each category as part of this disclosure.
5. (b) Has the company addressed diversity on its board in areas other than gender?
TWO marks if the company discloses details of a process used to consider board diversity, such as a target for board representation, proportion of potential candidates considered or mandating search firms to ensure that diverse candidates are included. ZERO marks if the company doesn’t have a diversity policy or doesn’t describe specific steps it takes to ensure non-gender diversity is reflected in recruitment. That means zero marks if a policy mentions several types of diversity without disclosing any specific measures related to improving non-gender diversity.
6. 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 a vague description of how the assessment is done with no details of the process used.
7. Do independent directors meet without management?
FOUR marks if they meet without management at every board meeting, including special meetings and not just regularly scheduled meetings. 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.
8. Does the company disclose the process the board uses to manage succession planning for the chief executive officer’s job?
THREE marks if yes, ZERO if no. 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.
9. 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.
TWO marks if the company fully describes education processes, including details of each specific training session that was held and who attended. Full marks will not be given if the company simply lists educational topics without giving details of the specific training sessions because it is unclear whether the topics were dealt with separately at specialized training sessions, or at a single training session during the year, or during a regular board meeting. It is also insufficient to list training topics “offered” or “available” to the board if the disclosure is not clear whether the training actually occurred and who took advantage of it. The company does not have to list each name if it says everyone on the board or a specific committee attended, but does have to disclose details of who attended if the session was attended by a smaller number of directors and not the entire group. ONE mark if the company gives a full description of education processes but leaves out some details about events and who attended. ZERO marks if no training is disclosed or if there is so little detail that it is unclear what training occurred.
10. Does the company disclose details of a retirement age or term-limit policy for directors, and what the details of a policy are?
TWO marks if it has a retirement-age or term-limit policy for its directors and it specifically says the age and/or length of service that triggers a director’s departure.
ZERO marks if no disclosure or it has no retirement-age or term-limit policy for its directors.
Note: The disclosure must be explicit, and marks will not be given for generic statements about board renewal that do not specifically mention retirement-age or term-limit policies.
Shareholding, questions 11 through 16, worth 13 marks out of 100
11. Are directors required to own shares or share units?
THREE marks if the requirement is equal to at least three times the retainer (calculated as the value of cash payments and equity grants) paid to directors – including the value of grants of shares or share units – and if there is a time frame disclosed for directors to reach their ownership requirement and return to the required level if they fall below. TWO marks if there is a requirement, but it is lower than three times the value of the retainer and share units. ONE mark if the company allows directors to meet their ownership value by using a measure other than the current market value of their equity – such as using a historic average value or using the acquisition value of equity at the date it was first obtained. This is because these values over time can lead to lower actual share ownership by directors when the share price declines. ONE mark if the company allows stock options or types of share units that have not yet been earned by directors to be counted toward share ownership requirements. ZERO marks if there is no share ownership requirement.
12. Does the company disclose the total market value (a dollar amount, not just number of units held) of directors’ equity holdings, including shares and vested deferred share units?
TWO marks if the company discloses the total market value of holdings excluding options; the market value OR number of shares held; the number OR market value for each type of equity instrument held; and the number OR market value of vested and unvested RSUs/PSUs.
ONE mark if the company discloses a total market value of holdings excluding options and share/equity count but it is unclear from the disclosure the number of each type of equity instrument held and whether it has vested.
ZERO if no or if the total includes options.
ZERO marks if the disclosed share ownership level of each director is not the current market value, but is instead a historic value, such as the value when the shares were acquired or a historic average price. Companies can calculate the ownership value using an average share price for the prior 30 days, but the average must be used consistently each year and not only when an average increases the share ownership level.
13. Does the company explain how each director’s share ownership meets (or fails to meet) the required share ownership guideline?
The disclosure must show the number or value of shares required to be owned, the director’s equity ownership level and must explain how the ownership compares to the requirement as a percentage, multiple or dollar value.
Note: Simply disclosing whether a director has met the requirement is not sufficient. The ownership must be presented in the same units as the requirement allowing shareholders to better interpret each directors investment in the company compared to the guideline. For example, if directors are required to own a certain dollar value of shares or a specific number of shares, the chart should compare the requirement to the actual ownership in those units.
ONE mark all the elements are clearly presented, ZERO if any of the elements are not disclosed for each director. ZERO if there is no share ownership requirement for directors. Also ZERO marks if the disclosed share ownership level of each director is not the current market value, but is instead a historic value as the value when the shares were acquired or a historic average value.
14. Is the CEO required to own shares?
THREE marks if there is a requirement to own at least five times the base salary in shares held directly or fully vested RSUs, PSUs, or other non-option instruments. THREE marks if the CEO is the company’s controlling shareholder. ONE mark if there is a requirement to own two to five times the base salary, or if the CEO can meet the ownership requirement by using a measure other than the current market value of the shares, such as a historic average or the acquisition value of the shares, or if unvested RSUs, PSUs, or other non-option instruments count toward the total. ZERO marks if there is no requirement, or if the requirement is less than two times the base salary, or if any stock options can be counted toward the total.
15. Are other named executive officers (those officers whose compensation is included in the proxy circular) required to own shares?
TWO marks if there is a requirement to own at least one times salary in shares. ZERO marks if there is no requirement, or if the requirement does not apply to all named executive officers, or if it is less than one times the base salary.
16. Does the company disclose the total current market value of the CEO’s accumulated shares and share units or equivalent equity holdings in one location in the proxy circular, and are the components broken out individually?
TWO marks if the current market value of shares and share units (including restricted share units) is disclosed and the company breaks down how much of the total comes from each type of holding. The value of performance share units and stock options does not have to be included in the list because their ultimate value is uncertain, but there will be no deduction if they are included as separate items if they are clearly explained.
ONE mark if the company includes the total value but does not break out the separate components. Also ONE mark if different types of share units are included together in one item when they include performance share units whose future value is uncertain or unknown. ONE mark if options are included in the total but the company does not explain how they were valued, such as whether the total is based on a mathematical estimate of the future value of all outstanding options, or whether the total includes only the value of options that are currently vested and/or in-the-money.
ZERO marks if the equity value is not disclosed or if the total does not include the value of all shares and share units. Also ZERO marks if the disclosed share ownership level for the CEO is not the current market value, but is instead a historic value, such as the value when the shares were acquired or a historic average price. Companies can calculate the ownership value using an average share price for up to the prior 30 days, but the average must be used consistently each year and not only when an average increases the share ownership level.
Compensation questions 17 through 27, worth 28 marks out of 100
17. (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 considered in determining the CEO’s bonus?
ONE mark if yes, ZERO if no.
17. (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.
17. (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.
17. (d) Can the CEO receive no bonus under the bonus plan design?
This addresses investor concerns that some bonus programs virtually guarantee at least some level of payout even when performance is weak, eroding the value of bonuses as rewards for good performance.
ONE mark if yes, ZERO marks if no. ZERO marks if the disclosure is not clear about whether a portion of the bonus can be paid whatever the performance.
18. (a) Does the company compare its performance with that of peers and make relative performance a factor in determining payouts for the CEO’s cash bonus, performance-share-unit or performance-stock-option plan?
This means compensation is affected by a company’s performance relative to peers and not just absolute terms. This addresses concerns that executives can underperform compared to their peers but still earn market competitive bonuses indicating high performance. Using relative performance metrics does not mean comparing or benchmarking pay to compensation levels of peers, but measuring payouts according to relative performance. For credit, relative metrics can be used to either pay current year cash bonuses and equity (restricted stock or option) grants or as performance hurdles on PSU or performance vesting option grants.
ONE mark if the company links cash bonus or performance equity payouts to performance relative to a peer group of similar companies. Also ONE mark if the CEO does not participate in any short-, medium- and long-term incentive plans due to extensive current share ownership. ZERO marks if payouts are not based on relative performance metrics.
18. (b) Does the company disclose the composition of the peer group used for comparing relative performance?
For example, if relative total shareholder return (TSR) is a performance metric, does the company disclose the peers that TSR is measured against?
ONE mark if yes, ZERO if no or if no peer group is used.
Note: An established index will be considered a peer group so long as the company does not modify it without disclosing the additions or deletions. If the company only uses a peer group for setting its general pay levels and not for measuring this year’s performance achievements, no points will be given.
18. (c) Does the company explain the rationale for the peer group it has chosen for measuring its comparative performance for equity payouts?
For example, a company might say peer group members are similar-sized companies, or operate in the same industry, or have similar business characteristics.
ONE mark if yes, ZERO marks if no.
Note: if the company only uses a peer group for setting its general pay levels and not for measuring this year’s performance achievements, no points will be given.
19. (a) Are there performance hurdles for stock options or share units, beyond simply requiring the share price to rise over time?
TWO marks if yes, ZERO if no. TWO marks if the company never pays the CEO with options or share units.
19. (b) Can there be no payout for the CEO’s performance-based options or performance share units?
This addresses investor concerns that metrics for some performance share units allow some level of payout under any scenario, even when performance is weak. There must be the possibility for no payout as part of the compensation formula. It is not acceptable to only say the board could later apply discretion to pay no award because it is unclear whether this will occur.
TWO marks if yes, ZERO if no. TWO marks if the company never pays the CEO with options or share units.
20. Does the company provide a “look back” or “back testing” table in the proxy circular showing how much the CEO has earned over the past five years from all compensation elements, including long-term features such as stock options and share units?
The table must show investors how the CEO’s actual pay compared to the intended compensation reported at the time of granting.
ONE mark if there is a “look back” chart and all long-term pay elements are included with an annual breakdown showing the amount awarded in each year over the past five years, and how the actual payout outcome compares to the intended compensation for each year over the past five years. ZERO marks if no information is provided or if it does not include all pay elements.
Note: If a new CEO has been on the job for less than a year, ONE mark even if there is not a “look back” chart. For CEOs with more than one year but less than five years of tenure, the look back chart should cover their full period on the job.
21. Does the company disclose the gains reaped by executives from exercising stock options over the prior year?
TWO marks if yes, ZERO if no.
22. Does the company disclose the total cost of compensation to the top executive team compared to a financial metric such as income or revenue?
It is not acceptable to only provide disclosure that compares the cost of compensation to the rate of share price growth. This is because comparison to a financial metric such as income makes it clear how much the compensation costs relative to the company’s financial resources. The calculation should show a percentage, and not an approximation such as “less than 1 per cent of revenue.”
ONE mark if yes, ZERO if no.
23. Does the company have a provision to claw back bonus payments to the CEO if wrongdoing is discovered?
TWO marks if yes, and if the policy allows directors to require a clawback of payments for anything the board determines to constitute wrongdoing. ONE mark if there is a policy, but clawbacks can only be ordered if the company’s financial statements have been restated due to wrongdoing. ZERO marks if there is no policy.
24. 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. Minimum requirement is a one-year holding period after leaving the company.
ONE mark if yes, ZERO if no.
25. Does the company require a double-trigger before paying compensation and permitting equity units to vest for top executives upon a change of control?
Such a rule means executives don’t automatically receive payments when a company’s ownership changes unless they also lose their jobs.
ONE mark if yes, ZERO if no.
Note: ONE mark if the company has no change-of-control payment provisions. ZERO marks if the company allows executives to resign voluntarily after a change of control and still receive payments, unless the permitted circumstances are detailed in the proxy circular. Such reasons might include a material change in responsibilities or a relocation of a job, but they must be specified. Companies cannot simply state that executives can resign for “good reasons” and receive severance payments.
26. a) Are stock options excessively dilutive?
Dilution is based on “overhang” or 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.
THREE marks if the dilution is less than 3 per cent of outstanding shares, or if the company has no option plan.
TWO marks if the dilution is between 3 and 5 per cent of outstanding shares. ONE mark if the dilution is between 5 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 repriced any of its options within the prior year.
26. (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 and 1.5 per cent. ZERO marks if the grant rate exceeded 1.5 per cent annually.
26. (c) Is there a vesting period before the CEO’s options can be exercised?
TWO marks if no options vest prior to the first anniversary and at least some of the options vest on the fifth anniversary of the grant. This encourages a long-term focus by management. ONE mark if all options vest no earlier than the first anniversary of the grant. ZERO marks if any options vest prior to the first anniversary of the grant. TWO marks if the CEO does not receive options.
27. Does the company pay directors using stock options or performance-based compensation such as performance share units or cash bonuses? (This does not include shares or share units that are not contingent on reaching performance goals.)
ONE mark if no, ZERO if yes.
Shareholder rights, questions 28 through 32, worth 19 marks out of 100
28. Do all shareholders have equal voting rights?
This question looks at voting rights in two steps, first assessing whether there are non-voting or subordinate voting shares, then assessing whether there are other types of unequal voting rights.
Companies with equal voting rights for all shareholders can score a maximum of 10 marks.
Companies start with 10 marks if they have no dual-class shares. If there are subordinate voting 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 vote-to-equity 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.
Companies that offer subordinate shareholders zero votes for board director elections will receive zero marks regardless of the vote-to-equity ratio.
If the company has no dual-class shares, we will then review two other issues related to voting rights, each worth a maximum of FIVE marks.
The first issue is whether shareholders can elect the whole board, or whether some directors are appointed (by a shareholder or manager, for example) so that their names don’t appear on the proxy ballot.
FIVE marks if all directors 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.
The second issue looks at whether any party – an administrator, manager or shareholder, for example – has rights unequal to ownership. For example, can anyone 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.
29. Does the company give shareholders an advisory vote on executive compensation (known as say-on-pay)? If the company received less than 80 per cent support on its say-on-pay vote in the prior year, does it clearly explain in its proxy circular what changes it has made to its compensation plan?
FOUR marks if there is a say-on-pay vote, ONE mark if there is a vote but the company has not explained its response to a low vote in the prior year, ZERO marks if there is no vote.
30. Does the company disclose how shareholders can engage with the board, beyond routine contact?
TWO marks if there is a description of a shareholder engagement process outlined in the proxy circular and if the company provides information about how to directly contact the board. The proxy circular needs to offer details or examples of specific things the company has done to engage with shareholders, beyond inviting shareholders to attend the annual general meeting. The contact information must include a way to reach the board directly, such as an e-mail or postal address for the board or the chair of the board. It is not sufficient to only provide indirect contact information, such as including the company’s general mailing address in the proxy circular or directing investors to the company’s website. ZERO marks if no shareholder engagement process is described in the proxy or if there is no board contact information.
31. Does the company describe how it deals with related-party transactions?
TWO marks if the company identifies a board committee responsible for reviewing related-party transactions and provides disclosure of policies that govern them, such as defining related parties or addressing how the value of transactions is evaluated. Disclosure must be more robust than simply stating that directors must declare if they have a material interest in a transaction and recuse themselves from discussions. Note: A company that merely states there were no related-party transactions, but does not identify the committee or policies, receives ZERO marks.
32. Does the company disclose in its shareholder proxy circular the voting results for directors in the prior year’s board elections, as well as the results for the company’s say-on-pay vote if one was held in the prior year?
Such disclosure assists investors in easily reviewing voting information that can otherwise be complicated to access.
ONE mark if yes, or if the company did not have a vote for directors in the prior year because it is a newly public firm. ZERO marks if no. Also ZERO marks if the company reports the voting result, but nominates a director for election in the current year who did not receive a majority of “for” votes in the prior year’s board election.
David Milstead