For the 23rd year in a row, Report on Business’ Board Games will rate 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.
This year, The Globe and Mail has committed to publishing the Board Games marking criteria at the beginning of the annual corporate “proxy season.” That’s when most Canadian companies issue their management information circular that contains the vast majority of the material on which Board Games bases scores.
The Globe’s data partner, Global Governance Advisors, will examine the boards of directors of companies and trusts in the S&P/TSX Composite Index to assess the quality of their governance practices and disclosure. The Globe will publish the Board Games report later this year.
The Globe made a number of significant additions and changes to Board Games for 2024.
The 2024 criteria build on the introduction of climate matters in 2023 by adding new disclosure requirements. Board Games will also now measure the degree to which companies use ESG and climate metrics in setting executive compensation.
A new criterion also measures how companies describe how their boards consider cybersecurity or technological risk issues.
Other new items:
- A requirement, derived from a new policy from proxy advisor Glass Lewis & Co., that one member of a company’s audit committee is a current or former CPA (Chartered Professional or Certified Public accountant) or chief financial officer.
- A requirement that a company hold a hybrid virtual and in-person annual shareholder meeting, not one or the other.
The Globe significantly revised other criteria:
- Companies no longer receive credit for simply having a shareholder advisory vote on executive compensation, called say on pay. Instead, marks are based on the level of shareholder approval the company received in the prior year and whether the company engaged with shareholders after a poor result.
- CEOs must now hold stock in their companies worth at least two times their total annual direct compensation, based on the number of years they’ve served in the role. The criterion, derived from recommendations by the Canadian Coalition on Good Governance, replaces one that simply called for companies to have a policy requiring the CEO to hold an amount equal to five times’ salary. Now, Board Games will evaluate actual stock ownership, which excludes all stock options and any unvested shares.
- To receive marks for avoiding excessive dilution from stock options, companies must have lower levels of dilution than required in the 2023 standards.
- It’s harder for companies with dual-class share structures to receive marks, as Board Games requires higher levels of voting power for the subordinate shareholders. However, in a new feature, companies with sunset provisions on the structure will get marks added back.
- The Globe expanded the requirements for companies to disclose the results of shareholder votes. Previously, companies needed to disclose just the votes for directors and say on pay. Now, companies must disclose the results from all matters voted on the previous year, with exact vote numbers for each class of shares.
The new material brings the number of Board Games criteria to 38. To make room, The Globe eliminated criteria on CEOs sitting on outside boards and directors receiving incentive pay. The Globe also combined, or reduced the marks available, for some other criteria.
Board Games Methodology for 2024
Board Composition and Oversight, 1 through 15, worth 45 marks out of 100
1. Board independence
SIX marks for boards with at least two-thirds 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 of a parent/sister/subsidiary company that controls the company;
· former members of management at the company or a parent/sister/subsidiary company within the previous five 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 (at least 30 per cent voting power) or related to the controlling shareholder of the company.
2. Splitting the role of chair and CEO
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. Directors sitting on other boards
ONE mark if no directors sit on four or more public company boards.
ZERO marks if any director sits on four or more public company boards.
There is no exception for related-company boards.
4. Representation of women on the board
4 (a) Number of women on the board
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 regardless of proportion if the board doesn’t have at least two women.
4 (b) Policies on women directors
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 the representation of women.
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 target.
5. Diversity
5 (a) Representation other than women
For the purposes of this question, “member of a diverse group” is any of the following: Indigenous; a racialized person (persons, other than Indigenous peoples, who are non-Caucasian in race or non-white in colour); has a disability; or is LGBTQ2SI+ (lesbian, gay, bisexual, transgender, queer, 2-spirit, intersex).
FOUR marks if a company explicitly discloses it has more than one board member from a diverse group and the company specifies to which group each member belongs.
THREE marks if a company explicitly discloses it has more than one board member from a diverse group but the company does not specify to which group each member belongs.
TWO marks if a company explicitly discloses it has one board member from a diverse group and the company specifies to which group each member belongs.
ONE mark if a company explicitly discloses it has one board member from a diverse group but the company does not specify to which group each member belongs.
The company must make clear if one director belongs to two or more diverse groups. A disclosure of percentages of the total board in each category of diverse groups may make a director that is part of two groups appear to be two directors, not one.
In identifying specific groups, the company may use a narrative or a board diversity matrix. The company cannot rely on shareholders looking at pictures of the directors to evaluate diversity. The company does not need to name the specific directors in each category as part of this disclosure.
5. (b) Consideration of board diversity other than the representation of women
TWO marks if the company discloses details of a process used to consider potential board candidates who self-identify as a member of a diverse group. Processes such as a target for board representation, required proportion of potential candidates in recruitment, inclusion on an evergreen list of potential candidates or mandating search firms to ensure that these types of diverse candidates are included. Companies do not need to have a process that considers all diverse groups. The policy/process disclosed must consider at least one diverse group and it cannot be combined with the consideration of women.
ZERO marks if the company doesn’t have a diversity policy or doesn’t describe specific steps it takes to ensure diversity, other than the representation of women, is reflected in recruitment. That means ZERO marks if a policy mentions several types of diversity without disclosing any specific measures related to improving diversity, other than the representation of women, or simply states that the board considers diverse candidates other than women.
6. Board performance evaluation systems
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. Or 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. Independent directors meeting 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 does not specify whether the meetings are actually held.
8. CEO succession planning
ONE mark if the company discloses the process the board uses to manage succession planning for the CEO’s job.
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. Director education processes
TWO marks if the company fully describes director education processes, including details of each specific training session it held and who attended during the fiscal year. Director education can include, but is not limited to, 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. Management update presentations are not considered training sessions for the purpose of this question.
To be clear, the company will not be awarded TWO marks for additional details 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 attended. 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. Retirement and term-limit policies for directors
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.
11. Cybersecurity
TWO marks if the company describes how its board considers cybersecurity or technological risk issues. The disclosure should identify a board committee or committees responsible for cybersecurity and technological risks and/or describe how and how often other board committees consider these issues, including as they review strategy, risk management and operating performance.
12. Audit committee composition
ONE mark if at least one audit committee member is a current or former CPA (chartered professional or certified public accountant) or chief financial officer, so long as the CPA is not or was not employed by the company’s current auditor and the CFO is not a current or former CFO of the company. The information should be found in the company’s skills matrix, directors’ biographies or elsewhere in the proxy circular.
13. Board responsibility for climate
TWO marks if the company describes how its board considers climate issues.
The disclosure should:
· explicitly state the board is responsible for oversight of climate-related targets and monitoring progress against these targets.
· identify a board committee or committees responsible for assessing material climate risks and opportunities, or state that it is a matter for consideration by the full board.
· describe the processes and frequency by which the board and its committees are informed about climate change factors, such as a member of senior management reporting to the board on climate change factors on a quarterly basis.
· describe how the full board or its committees consider climate-related issues, including as they review strategy, risk management and operating performance.
ONE mark if two or three of the four elements are present in the company’s disclosure
ZERO marks if one or none of the four elements is present.
Companies cannot get credit if the policies and procedures are described broadly, such as “ESG” or “environment”; disclosure must be climate-specific, using words or phrases such as “climate change,” “global warming,” “greenhouse gases” or “carbon.”
14. Climate disclosure
14 (a) ONE mark if the company discloses in its proxy circular any specific time-based climate goals, measures of climate impact, or time periods for which it is conducting a scenario analysis on the impact of climate change. The company can refer shareholders to a separate document for additional details on these matters, but must describe at least one in the circular itself.
ZERO marks if the company does not disclose any goals, targets, measures or analysis.
14 (b) ONE mark if the company identifies standards it uses for climate disclosures, such as the recommendations of the Task Force on Climate-Related Financial Disclosures, the Sustainability Accounting Standards Board, or IFRS S1 or IFRS S2.
ZERO marks if the matter is left unaddressed.
15. Climate board expertise and training
15 (a) Climate expertise
ONE mark if the company includes climate expertise as a “required skill” in the board skills matrix and at least one director is attributed with climate expertise. Companies can get credit if “ESG” is listed as the required skill and the identified directors’ biographies include climate competency.
15 (b) Climate training
ONE mark if at least one education session provided to the board or a board committee during the fiscal year is a climate-related session. Companies cannot get credit for education described as “ESG” or “environment”; disclosure must show the education is climate-specific, using words or phrases such as “climate change,” “global warming,” “greenhouse gases” or “carbon.”
Shareholding, 16 through 21, worth 13 marks out of 100
16. Director share ownership requirements
THREE marks if a requirement for a director to own shares or share units is equal to at least three times the retainer paid to directors (calculated as the value of cash payments and equity grants) – 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.
17. Disclosure of directors’ equity holdings
TWO marks if the company discloses the total market value of each director’s 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 restricted share units (RSU) or performance share units (PSU).
ONE mark if the company discloses a total market value of each director’s holdings, excluding options, and the share or equity count, but it is unclear from the disclosure the number of each type of equity instrument held and whether it has vested.
ZERO marks if no or if the total includes options. Also 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.
18. Explanation of directors’ equity ownership versus guidelines
ONE mark if the company clearly explains how each director’s share ownership meets (or fails to meet) a 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 director’s 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 marks if any of the elements are not disclosed for each director. Also ZERO marks if there is no share ownership requirement for directors. And 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 value.
19. CEO share ownership requirements
THREE marks if the CEO owns a minimum threshold of shares in comparison to the CEO’s total direct compensation (TDC) in the past year. Only shares held directly and fully vested RSUs, PSUs or other non-option instruments will count toward share ownership. TDC is the sum of all columns in the company’s Summary Compensation Table except for Pension Value and All Other Compensation.
For THREE marks:
· A CEO who has served 10 years or more in the position at their current company is expected to hold shares worth at least two times TDC.
· A CEO who has served five years or more in the position at their current company is expected to hold shares worth an amount equal to or greater than TDC.
· There are no expectations for a CEO who has served less than five years in the position at their current company so long as the company has one of the following share-purchase requirements:
¨ to use a portion of the cash proceeds received upon vesting of any cash-settled share-based awards to purchase common shares of the company;
¨ to retain a portion of shares they receive upon settlement of any share-based award
¨ to annually invest some amount in common shares of the company.
For TWO marks:
· A CEO who has served 10 years or more in the position at their current company holds shares worth between one and two times TDC.
· A CEO who has served five years or more in the position at their current company holds shares worth between one-half and one times TDC.
For ONE mark:
· A CEO who has served more than five years in the position at their current company misses the minimum threshold, but the company has at least one share-purchase requirement.
· The CEO has served less than five years in the position and the company has no share-purchase requirements
ZERO marks if a CEO who has served more than five years in the position at their current company misses the minimum threshold and the company has no share-purchase requirements.
20. Named executive officer share ownership requirements
TWO marks if there is a requirement for other named executive officers (those officers whose compensation is included in the proxy circular) 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.
21. Disclosure of CEO’s equity holdings
TWO marks if the company discloses the current market value of shares and share units (including RSUs) owned by the CEO in one location in the proxy circular. The company must break down how much of the total comes from each type of holding. The value of PSUs 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. Or ONE mark if different types of share units are included together in one item when they include PSUs, 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, 22 through 32, worth 22 marks out of 100
22. CEO bonus plans
22 (a) Disclosure of plan design
ONE mark if the company provides a percentage weighting of the factors considered in determining the CEO’s bonus and provides the specific targets for all goals in the annual bonus plan that are based on financial metrics.
ZERO marks if it provides just weightings, just targets or neither.
ZERO marks if it provides an overall weighting for “corporate performance,” but fails to provide specific weightings for specific metrics used to measure corporate performance.
ZERO marks if the company names financial measures but fails to disclose the specific targets.
22 (b) Performance outcomes
ONE mark if the company explains the outcome of what actually happened with performance goals and how the outcome affected the CEO’s bonus.
ZERO marks if it does not.
23. Use of a peer group in setting incentive compensation
TWO marks if the company uses relative financial performance metrics, making performance against that of the company’s peers, a factor in short- or long-term incentive compensation, and discloses the composition of the group used for comparing relative performance. It addresses concerns that executives can underperform compared to their peers, but still earn pay that indicates high 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 for grants of PSUs or performance vesting options. For credit, the company must explain the rationale for the peer group it has chosen for measuring its comparative performance for equity payouts, such as similar-size companies or those that operate in the same industry.
Note: An established stock index will be considered a peer group so long as the company does not modify it without disclosing the additions or deletions.
TWO marks if the CEO does not participate in any short-, medium- and long-term incentive plans due to extensive current share ownership.
ONE mark if relative metrics are used but the company fails to explain how it chose members of the peer group.
ZERO marks if payouts are not based on relative performance metrics, if it does not disclose the composition of a peer group, or does not use one.
24. Performance-based stock awards
24 (a) Performance hurdles
TWO marks if there are performance hurdles attached to stock options or share units representing at least half the value of the grants in the fiscal year. Performance hurdles are any financial, operational or stock-price metric that must be met for awards to vest, as opposed to time-based vesting based on continued employment. The company must disclose a valuation for each component of its equity awards to facilitate this evaluation.
ONE mark if more than half the value of stock awards is purely time-based, but some of the awards have performance hurdles. Or ONE mark if the proportion of the awards is not explicitly disclosed, but some awards have performance hurdles.
ZERO marks if there are no performance-based criteria attached to any stock option or share unit awards.
TWO marks if the company never pays the CEO with options or share units.
24 (b) Potential for zero payout
TWO marks if there can be no payout for the CEO’s performance-based options or PSUs. This addresses investor concerns that metrics for some PSUs 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 that no payout can only occur if the board applies discretion because no clear performance threshold is disclosed and it is unclear whether this will occur.
ZERO marks if there is a guaranteed minimum payout which effectively means part of the award vests based on time only.
TWO marks if the company never pays the CEO with options or share units.
25. Historical compensation disclosure
ONE mark if the company provides 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.
The chart should show all long-term pay elements 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.
26. Stock option gains
ONE mark if the company discloses the gains reaped by executives from exercising stock options over the prior year.
ZERO if it does not.
27. Cost of compensation comparisons
ONE mark if the company discloses 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.”
ZERO if it does not.
28. Compensation clawbacks
ONE mark if the company has a provision to claw back bonus payments to the CEO if wrongdoing is discovered. The policy must allow directors to claw back payments for anything the board determines to constitute wrongdoing.
ZERO marks 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.
29. CEO shareholding periods
ONE mark if the company has 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.
ZERO if it does not.
30. Double-trigger severance requirements
Note: Double-trigger provisions require a change of control of the company (the first trigger) and a termination event (the second trigger) for a severance payment and/or option award vesting to be accelerated. The company’s provisions cannot provide for payouts or accelerated option vesting based on the board’s discretion or if the termination event includes provisions for voluntary termination, resignation or resignation for “good reason” without disclosing the “good reason” definition outlined in an employment agreement or agreements.
ONE mark if the company requires a double trigger before paying compensation and permitting equity units to vest for top executives upon a change of control of the company. Such a rule means executives don’t automatically receive payments when a company’s ownership changes unless they also lose their jobs.
ZERO if there is no double trigger.
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 in the proxy. Companies cannot simply state that executives can resign for “good reason” and receive severance payments.
31. Stock option compensation
31. (a) Excessive dilution
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. If a company has more than one class of shares, dilution is measured for whichever class of shares is diluted by the outstanding options.
TWO marks if the dilution is less than 2.5 per cent of outstanding shares, or if the company has no option plan.
ONE mark if the dilution is between 2.5 and 5 per cent of outstanding shares.
ZERO marks if the dilution is more than 5 per cent. Also 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.
31. (b) Excessive grant rates
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.
31. (c) Vesting period for CEO options
ONE mark if no options vest prior to the first anniversary and at least some of the options vest on the fifth fourth anniversary of the grant. This encourages a long-term focus by management.
ZERO marks if any options vest prior to the first anniversary of the grant or prior to the fourth anniversary of the grant.
ONE mark if the CEO does not receive options.
32. ESG and climate in compensation
THREE marks if a company discloses any quantifiable ESG metrics in either its short-term or long-term incentive plans (STIP, LTIP) and at least one of the metrics is related to climate matters.
TWO marks if the company uses quantifiable ESG metrics in either its STIP or LTIP, but none of the metrics make reference to climate.
ONE mark if “ESG” or “climate” is mentioned as a determinant in either plan, but there are no quantifiable metrics, or specifics.
ZERO marks if there is no reference to any elements of ESG in either the STIP or LTIP.
Shareholder rights, 33 through 38, worth 20 marks out of 100
33. Shareholder voting rights
This section 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 the common shares available on a major exchange 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 less than 2.1.
THREE marks if the ratio is between 2.1 and 3.1.
TWO marks if the ratio is between 3.1 and 4.1.
ZERO marks if the ratio is 4.1 or worse.
Companies that offer subordinate shareholders zero votes for board director elections will receive ZERO marks regardless of the vote-to-equity ratio.
Companies that have a sunset provision on the dual-class shares with an explicit end date that will occur in 10 or fewer years will receive two additional marks. Companies that have a sunset provision on the dual-class shares that will occur at an indefinite time in the future, such as the retirement or death of a controlling shareholder, founder or executive, will receive one additional mark.
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) and 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, although not a majority.
ZERO marks if a majority are appointed and not elected.
The second issue looks at whether any whether any agreement provides a party – an administrator, manager or shareholder, for example – with rights unequal to ownership. For example, does an agreement allow for anyone to nominate/appoint nominate directors out of proportion to ownership? Is there a voting power top-up or right that guarantees a minimum level of voting power or base right that would make rights unequal to ownership? Can anyone veto key issues – such as changes to senior management or assets sales and purchases – without majority ownership?
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.
34. Say on pay
FOUR marks if the company gives shareholders an advisory vote on executive compensation (known as say on pay) and the company received at least 95 per cent of the vote in the prior year in favour.
THREE marks if the company gives shareholders an advisory vote on executive compensation and the company received between 90 per cent and 95 per cent of the vote in the prior year in favour.
TWO marks if the company gives shareholders an advisory vote on executive compensation and the company received between 80 per cent and 90 per cent of the vote in the prior year in favour.
ONE mark If the company received less than 80 per cent support on its say-on-pay vote in the prior year, but it clearly explains in its proxy circular what changes it has made to its compensation plan.
ZERO marks if there is no vote or if the company received less than 80 per cent support in the prior year and has not explained how it responded to and engaged with shareholders.
35. Shareholder engagement
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.
36. Related-party transaction governance
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 company evaluates the value of transactions. 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.
ZERO marks if a company merely states there were no related-party transactions, but does not identify its committee or policies.
37. Annual general meeting voting results
ONE mark if the company discloses exact vote totals, not percentages, for each measure on the prior year’s proxy, for each class of shares allowed to vote. Such disclosure assists investors in easily reviewing voting information that can otherwise be complicated to access. ONE mark if the company’s public shareholders did not vote on any matters in the prior year because it is a newly public firm.
ZERO marks if no.
38. Virtual shareholder meetings
ONE mark if the company holds a hybrid virtual and in-person annual shareholder meeting. No mark if the AGM is in-person, or virtual, but not both.
David Milstead