As of Oct. 31, publicly listed companies will be obliged to follow new rules when it comes to executive compensation disclosure as the Canadian Securities Administrators (CSA) has adopted amendments to its Statement of Executive Compensation and Continuous Disclosure Obligations.
The amendments partly came about after developments in the United States, including the Securities and Exchange Commission’s rules amending compensation and corporate governance disclosure requirements for companies and the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The changes also came about after a CSA review of disclosure at 70 reporting issuers in 2009 saw a need for improvement.
“Companies have worked very hard to address the new rules but, much like anything that is new, it takes a while to come to grips with all of the implications of the rules. And practice has varied and some of the changes… reflect frustration that the regulators have had with issuers that have taken an aggressive interpretation to some of the provisions,” said Andrew MacDougall, a partner at law firm Osler, Hoskin & Harcourt in Toronto.
“So far, we’ve seen a really good improvement but with the new CSA disclosure rules, they raise the bar again,” said Paul Gryglewicz, managing partner at Global Governance Advisors in Toronto.
A key amendment to the rules requires public companies to disclose whether their board of directors adequately considered the implications of the risks associated with the company’s compensation policies and practices.
“Greater transparency on the compensation policies of public companies will allow investors to make better informed voting and investment decisions, and will help them determine whether management’s incentives are aligned with their interests,” said Bill Rice, chair of the CSA and chair and CEO of the Alberta Securities Commission.
A company must disclose whether the board of directors or a committee of the board considered the extent and nature of their role in the risk oversight, any practices used to identify and mitigate
compensation policies and practices that could encourage an executive to take inappropriate or excessive risk or any risks arising from “compensation policies and practices that are reasonably likely to have a material adverse effect on the company,” said the CSA.
“Basically, they want to ensure that a payout couldn’t accrue from a compensation perspective that could actually put the company at a worse financial state or put the business at increased risk, outside of the norm of what they would expect,” said Gryglewicz.
The concern is compensation may not align with a company’s risk appetite, said MacDougall.
“Interestingly enough, the key risk that they don’t identify in the instrument is whether your compensation aligns with your strategy. And if your compensation is encouraging behaviours that are not consistent with your strategy, that is really where investors would have their principal concern.”
The examination of compensation and risk pushes companies to consider whether things such as clawback policies or equity retention or hold policies are appropriate mechanisms to better align compensation outcomes with risk that’s been assigned, said MacDougall.
It’s a matter of aligning the expectations of shareholders with the type of risks taken by senior management and the type of incentives that relate to those risks, said Thierry Dorval, a partner and chair of the corporate governance and director’s liability team at law firm Norton Rose in Montreal.
“Compensation can become a risk in itself if… the interests of shareholders and those of senior management are not aligned.”
Companies must also disclose goals that are based on objective, identifiable measures; however, they are not required to disclose these goals “if a reasonable person would consider that disclosing them would seriously prejudice the company’s interests,” said the CSA.
“Now you really need to rationalize why you’re claiming that and I think that you might see a bit more of a pushback from the CSA on… triggering that clause,” said Gryglewicz.
There is no right or wrong answer as to how you come up with the conclusion for the particular issuer or company, said MacDougall.
“Given the guidance and the fact that goals based on broad corporate-level financial metrics cannot be considered to be seriously prejudicial, there may be a number of issuers that will be looking at what performance metrics they use and they may choose different ones to bolster their conclusion that disclosure would be seriously prejudicial.”
A company must also describe any policies and practices adopted by the board of directors to determine executive compensation, according to the CSA. And it must disclose the name of each compensation committee member, say whether or not she is independent and detail any relevant skills and experience that enable the committee to make decisions around compensation policies and practices.
“(That’s) certainly one that’s been on the radar in Canada for some time and it absolutely makes sense to have some members with experience and, indeed, expertise in compensation matters,” said MacDougall.
It’s similar to an audit committee, where members must be financially literate, said Dorval. “We’re going to see something similar, which will be ‘compensation-literate,’” he said.
As part of the new amendments, the name of any compensation consultants must also be disclosed, along with: a summary of their mandate; the date they were originally retained; any affiliation to the company or its executive members; and their fees.
In all of this, HR plays a very important role, say the experts. HR supports the process and the board and compensation committee throughout the year, planning quarterly meetings, helping organize the data and making sure information gets to independent advisors, said Gryglewicz.
The board needs considerable information to make the right decisions with respect to employees in areas such as motivation, succession planning or skill levels — and here HR is important, said MacDougall.
“It plays a key role in assisting with the articulation of the compensation decisions...in making sure that all of the personal elements beyond mere quantum of compensation are considered when making compensation decisions.”
One of HR’s big challenges is to manage the expectations of employees, shareholders and other stakeholders, said Dorval. It’s very important investor relations works hand-in-hand with HR to have a good plan of action for both sides.
“Very often, problems come from a mismatch between the expectations of shareholders and those of employees, so it’s a very important role.”
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