How we ranked Canada’s corporate boards

For the 18th 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.
Markers at the David and Sharon Johnston Centre for Corporate Governance Innovation at University of Toronto examined the boards of directors of 224 companies and trusts in the S&P/TSX Composite Index to assess the quality of their governance practices.
The chart shows the total marks for 2019 and 2018 based on dozens of individual criteria across four broad subcategories. Some of the marking criteria or weightings have changed from the previous year. In 2019, Board Games clarified methodology on how companies valued the CEOs’ share holdings, and extended that methodology to directors’ holdings. Rules on share ownership requirements were extended to other executives named in companies’ proxy circulars.
Board Games also clarified and strengthened rules on companies’ disclosure on how shareholders can engage with the board of directors, beyond attending the public annual meeting.
Because of the changes, the marks in 2019 are not directly comparable to prior years.
The marks are based on information published in the most recent annual shareholder proxy circulars of companies who were members of the S&P/TSX composite index through the end of September. Companies added to the index in the third quarter were not included.
Four companies in the composite index – limited partnerships affiliated with Brookfield Asset Management – were not marked this year because they did not file a proxy circular. Aphria Inc.’s 2018 proxy was marked because it filed its 2019 proxy in late October.
Worth 32 marks out of 100
Four marks for boards with at least two-thirds of independent directors. Two marks if more than 50 per cent of directors are independent. Zero marks if there is a majority of related directors.
Note: Independent means directors have no links to the company beyond their board role. That means, for example, they are not management, relatives of management, former members of management within the previous five years, or people whose firms do business with the company – including, for example, lawyers, accountants, suppliers, or investment bankers. Directors will be considered related if they are paid extra compensation by the company for providing non-board services, such as consulting work. We also mark as related those directors who are controlling shareholders of the company or who work for a parent company that controls the public subsidiary.
Two marks if the committee is fully independent. One mark if there are one or more related directors who are not management. Zero marks if a member of management is on the committee.
Two marks if the committee is fully independent. One mark if there are one or more related directors who are not management. Zero marks if a member of management is on the committee or if there is no committee.
Two marks if the committee is fully independent. One mark if there are one or more related directors who are not management. Zero marks if a member of management is on the committee or if there is no committee.
Four marks if the roles are split and there is a fully independent chairperson. Two marks if they are split, but the chairperson is a related director. One mark if they are split, but the chairperson is a member of management. Zero marks if the roles are not split.
Note: There is no credit for not splitting the roles but having a lead independent director on the board.
One mark if no, zero if yes.
One mark if no, zero if yes.
Three marks if at least 33 per cent of directors are women. Two marks if 25 to 33 per cent of the board are women. One mark if there is at least one woman on the board. Zero marks if there are no women.
Two 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 50 per cent women on the board will receive two marks even if they have not adopted a formal diversity target.
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.
Three 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.
Three marks if yes, zero if no.
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.
Worth 30 marks out of 100
Three marks if the requirement is equal to at least three times the retainer (calculated as the value of both 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. Zero marks if there is no share ownership requirement.
To measure director share ownership, we include the value of shares and long-term share units held by the director. We do not include stock options or types of share units that have not yet been earned by directors. Those can include performance units that are contingent on future conditions that have not yet been achieved, or units that only vest if directors stay on the board for a certain number of years into the future and will otherwise be worthless if the director resigns sooner. Such units have not yet been earned by the director, who could resign before the time limit is reached.
Four marks are available, but minus one mark for each director who owns less than three times the annual retainer (including the value of grants of shares or share units). If a director has been on the board less than one year, the ownership requirement does not apply. If a director has been on the board one to two years, the required ownership level is reduced to one times the value of the retainer and share units.
Note: CEOs and board chairs who are also directors are not included in the marking because their share ownership is assessed separately. That means there will be no deduction for this question if the CEO or chair does not meet the director share ownership threshold.
One mark if the chair owns more than three times the annual retainer. If the chair has been on the board less than one year, the ownership requirement does not apply. If the chair has been on the board one to two years, the ownership requirement is reduced to one times the value of the retainer and share units.
Two marks if there is a requirement to own at least three times the base salary or if the CEO is the company’s controlling shareholder. One mark if there is a requirement to own one to two times the base salary, or if the CEO can meet the ownership requirement by using a measure other than the current market share of the shares, such as a historic average or the acquisition value of the shares. Zero marks if there is no requirement or if the requirement is less than one times the base salary.
One mark is there is a requirement to own 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.
To measure CEO share ownership, we include the value of shares and long-term share units held by the CEO. We do not include stock options or types of share units that have not yet been earned. Those can include performance units that are contingent on future conditions that have not yet been achieved or units that only vest if a CEO stays in the job for a certain number of years into the future and will otherwise be worthless if he or she resigns sooner. Such units have not yet been earned by the CEO and could be worthless if he or she resigns before the time limit is reached.
Two marks if the CEO owns shares worth at least triple his or her base salary. One mark if the CEO owns shares worth less than three times his or her base salary, but worth at least 1 times the base salary. Zero marks if the CEO owns shares worth less than one time his or her base salary.
Note: There is no ownership requirement for CEOs on the job for less than one year. CEOs who have been in the job more than one year but less than three years get three marks if they own shares worth at least one time their base salaries and two marks if they own half to one times their salary.
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.
One mark if yes, zero if no.
One mark if yes, zero if no.
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.
One mark if yes, zero if no.
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.
This means compensation is affected by a company’s comparative performance and not just improvements in absolute terms, addressing concerns that executives can underperform their peers but be paid a bonus for improved results due to external economic factors such as commodity prices. Using relative performance metrics does not mean comparing or benchmarking pay to compensation levels of peers, but measuring this year’s performance achievements to peers.
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.
One mark if yes, zero if no or if no peer group is used.
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.
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.
One mark if yes, zero if no. One mark if the company never pays the CEO with options or share units.
One mark if yes, zero if no. One mark if the company never pays the CEO with any options or share units.
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 chart should cover their full period on the job.
Two marks if yes, zero if no.
One mark if yes, zero if no.
Worth 28 marks out of 100
Three 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.
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.
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.
One mark if yes, zero if no.
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.
Two marks if the dilution is less than 5 per cent of outstanding shares, or if the company has no option plan. 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.
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.
Two marks if yes and at least some of the options vest over at least five years. This encourages a long-term focus by management. One mark if all options vest between one year and four years. Zero marks if any options vest in less than one year.
One mark if yes, zero if no.
The burn rate should be expressed as a percentage, calculated by dividing the number of new options granted in the prior year by the total number of shares outstanding. Credit will not be given if the number of options granted in the prior year is in any way modified, for example by subtracting options that have expired, cancelled or were terminated in the prior year.
One mark if yes, zero if no.
One mark if no, zero if yes.
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.
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.
Worth 10 marks out of 100
One mark if there is full disclosure and if the disclosure is included in the part of the proxy circular where companies discuss which directors on the board are related or unrelated. Zero marks if company does not disclose a director’s relationship in the proxy circular.
One mark if yes, zero if no.
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.
Two marks if all board and committee meeting attendance is disclosed and board members attended at least three-quarters of board and committee meetings. One mark if any board member has missed more than one-quarter of meetings and is not put up for re-election. Zero marks if committee attendance is not disclosed, or if a board member or a committee member missed more than one-quarter of meetings and is put up for re-election.
Two marks if yes, zero if no. Also zero marks if the company discloses the value of directors’ equity holding but the total includes stock options or unvested share units, which are compensation that has not been realized yet and may not be earned.
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.
Note: The ownership must be presented in the same units as the requirement. 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.
One mark if yes, zero marks if no.
One mark if yes, or if company states it has no retirement age policy for its directors. Zero marks if no disclosure.
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 policies.
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