Some of Canada’s largest institutional investors are concerned about the increased use of adjusted and inconsistent measures of financial results, saying more caution is needed – especially when the metrics are used to calculate compensation.
Speaking on a panel at the annual meeting for the Canadian Coalition for Good Governance, three pension-fund CEOs weighed the most pressing issues facing boards of companies they invest in as well as their own governance challenges. Among the topics of discussion was companies’ use of customized earnings measures, called “non-GAAP” – meaning they don’t follow generally accepted accounting principles.
“There’s no consistency,” said Gordon Fyfe, chief executive officer of British Columbia Investment Management Corp. “Back in the 1980s, about 50 per cent of the numbers we would see are unaudited, non-GAAP. Today that’s approaching 90 per cent, and when that stuff starts to affect compensation … I start to have a real issue with that.”
The criticism comes at a moment when some Canadian advocacy groups and regulators are reassessing how effective alternative assessments of profit are and mulling new standards to improve their use. This week, Canada’s Accounting Standards Board (AcSB) issued a new draft framework to help make reported financial information more relevant to a range of stakeholders. That followed indications from Canadian securities regulators that they could take action against companies that misuse alternative earnings gauges in the future.
Mr. Fyfe, who is also BCI’s chief investment officer, said he and the heads of other large Canadian funds meet twice annually with the governor and deputy governor of the Bank of Canada, and the topic of the growing use of alternative profit measures was discussed at the most recent meeting a month ago.
Kevin Uebelein, CEO of the Alberta Investment Management Corp., said that the non-GAAP measures can be useful tools for analyzing companies – and even for determining compensation – but he worries about their susceptibility to being abused.
“They have to fulfill certain rules in my mind,” Mr. Uebelein said, adding that the figures should be independently verified for board members and shareholders, beyond just management’s assurances that the numbers can be backed up.
“They need to be completely transparent, and wherever possible reconciled back to GAAP,” Mr. Uebelein said. “They need to be consistent year-to-year, period-to-period. So often you see these things – they’re cherry-picking non-GAAP disclosure from annual report to annual report … that’s abhorrent to me as an analyst.”
The need for better climate change-related disclosures by public companies and greater diversity on corporate boards also took centre stage during Friday’s event. Hugh O’Reilly, president and CEO of OPSEU Pension Trust, said he would like to see mandatory quotas for the number of women on boards. Under the current rules, companies are not required to implement formal targets or have a diversity policy – only to explain the reasons why they choose not to implement such policies.
“I have been talking about diversity and equity for 40 years of my life,” Mr. O’Reilly said, noting that the beliefs are his own and not those of his organization. “I’m tired of talking. We have to start doing. This is only going to happen if we have mandatory requirements.”
Mr. Fyfe also weighed in on the issue, arguing that having more diverse voices around the table could help boards identify and manage issues around harassment and workplace culture.
“If everyone [on the board] is a 63-year-old man, a lot of 63-year-old men have not been subject to sexual harassment, so are they sensitive to it? They may not have experienced any cultural issues, so are they sensitive to it?” Mr. Fyfe said.