CPP Investment Board will vote against stock options, favour independent directors
The Canada Pension Plan Investment Board wants companies to stop handing out stock options.
The board released sweeping new proxy voting guidelines that indicate how it is likely to vote on corporate governance issues in companies it owns shares in on behalf of 16 million CPP contributors and beneficiaries.
The guidelines oppose stock options and having management sit on board committees. But they approve of directors and management receiving performance-based stock grants to be held during their tenure with the company and all public companies having a majority of independent directors.
The problem with stock options
The board said stock options are problematic in many areas, including:
•their effectiveness in aligning management and shareholder interests;
•the potential dilutive impact on existing shareholders;
•their tendency to focus management on short-term performance;
•their use as a cash rather than ownership incentive; and
•intractable accounting issues.
“While many aspects of granting stock options could be improved, the result in our view would still be inferior to direct share ownership,” the guidelines state.
Directors should hold onto shares
The board’s position supports a portion of annual director compensation being paid in shares at market value, companies establishing minimum share ownership for directors and directors being required to hold such shares while on board and for at least one year after leaving the board.
It also wants director compensation to be equal, at a minimum, to the per diem paid to the company’s senior professional advisors.
In the case of management, the board wants a portion of total compensation paid in shares with executives required to own a minimum value of shares as a multiple of base salary while employed by the company.
Independent directors
The board wants all public companies, regardless of size, to have a majority of directors who are independent of management with no direct or indirect material relationship to the company other than director’s fees and shareholdings.
This would ensure the individual’s judgment is not compromised by other loyalties in serving the best interests of all shareholders, the board said.
Boards of directors are also encouraged to evaluate their effectiveness on an annual basis and to develop a process for asking underperforming directors to step down. The CPP Investment Board said this is preferable than relying only on “triggers”, such as age limits, a director changing principal occupation, poor meeting attendance or term limits.
The guidelines support:
•An in-camera meeting without management and management directors present before or after every board and committee meetings to ensure candid discussion.
•Separation of the chair and CEO as these positions have different responsibilities requiring different leaders.
•A formal annual board review of the CEO’s performance and compensation.
•All companies, irrespective of size, establishing audit, compensation and nominating of governance committees chaired by independent directors, with a majority of independent directors, and no management directors, as members.
The CPP Investment Board invests funds not needed by the CPP to pay current pensions in capital markets. It manages more than $18.4 billion worth of assets out of the $55 billion the Canada Pension Plan has.
The board released sweeping new proxy voting guidelines that indicate how it is likely to vote on corporate governance issues in companies it owns shares in on behalf of 16 million CPP contributors and beneficiaries.
The guidelines oppose stock options and having management sit on board committees. But they approve of directors and management receiving performance-based stock grants to be held during their tenure with the company and all public companies having a majority of independent directors.
The problem with stock options
The board said stock options are problematic in many areas, including:
•their effectiveness in aligning management and shareholder interests;
•the potential dilutive impact on existing shareholders;
•their tendency to focus management on short-term performance;
•their use as a cash rather than ownership incentive; and
•intractable accounting issues.
“While many aspects of granting stock options could be improved, the result in our view would still be inferior to direct share ownership,” the guidelines state.
Directors should hold onto shares
The board’s position supports a portion of annual director compensation being paid in shares at market value, companies establishing minimum share ownership for directors and directors being required to hold such shares while on board and for at least one year after leaving the board.
It also wants director compensation to be equal, at a minimum, to the per diem paid to the company’s senior professional advisors.
In the case of management, the board wants a portion of total compensation paid in shares with executives required to own a minimum value of shares as a multiple of base salary while employed by the company.
Independent directors
The board wants all public companies, regardless of size, to have a majority of directors who are independent of management with no direct or indirect material relationship to the company other than director’s fees and shareholdings.
This would ensure the individual’s judgment is not compromised by other loyalties in serving the best interests of all shareholders, the board said.
Boards of directors are also encouraged to evaluate their effectiveness on an annual basis and to develop a process for asking underperforming directors to step down. The CPP Investment Board said this is preferable than relying only on “triggers”, such as age limits, a director changing principal occupation, poor meeting attendance or term limits.
The guidelines support:
•An in-camera meeting without management and management directors present before or after every board and committee meetings to ensure candid discussion.
•Separation of the chair and CEO as these positions have different responsibilities requiring different leaders.
•A formal annual board review of the CEO’s performance and compensation.
•All companies, irrespective of size, establishing audit, compensation and nominating of governance committees chaired by independent directors, with a majority of independent directors, and no management directors, as members.
The CPP Investment Board invests funds not needed by the CPP to pay current pensions in capital markets. It manages more than $18.4 billion worth of assets out of the $55 billion the Canada Pension Plan has.
