Regulatory, peer pressure driving change in public companies

While Canadian boards and directors have been under pressure from regulators to implement reforms to boost diversity in their ranks, the most common profile for a director of a TSX company remains a male in his early 60s.

According to the third annual edition of “Governance Insights” from Davies Ward Phillips & Vineberg LLP, “there continues to be a significant deficit of women on Canadian boards, with only 10.5 per cent of a subset of 3,275 board seats occupied by women in 2013.”

“I think it’s becoming accepted that generally, diversity on boards — whether it’s women or otherwise — tends to foster better corporate governance,” says Davies partner Jennifer Longhurst. “So part and parcel of that, I think we’re seeing issuers more and more focused, as part of evaluating their overall effectiveness, looking at composition. While we have seen some progress of women’s representation increasing on boards and leadership roles increasing, that growth has been slow.”

Longhurt’s colleague William Ainley adds, “It’s way behind where it should be.

“I finished law school in 1979 and half the people in my graduating class were women and the majority who finished in the top 20 per cent were women so to me the idea that 35 years later we’re having a serious discussion about women as a diversity issue on boards is slightly appalling to me. I’m discouraged in a way — the fact the first phase of a diversity battle on Canadian boards is with women I think in a way points to the fact this is not an easy thing to solve.”

But a good place to start might be with tenure limits. One critic of the report suggests by not looking at the tenure of board members the issue of board profile isn’t being fully addressed.

“Tenure limits are not even mentioned in this report and there’s no mention of ethnicity for diversity and even how to diversify corporate boards,” says Richard Leblanc, an associate professor of law, governance, and ethics at York University. “They don’t look at skillset or competency and that’s where the focus is right now — what background and skills does the director have?”

Ainley agrees the issue of tenure terms is something the report should focus on in the future.

“My sense is they are long — too long. People sit on boards for 15 to 18 years and I don’t think it’s had the statistical attention that issue deserves. I think we should take that on for next year.”

If one really believes in diversity though, says Ainley, the problem of tenure should be addressed not because it’s time for somebody to leave a board but because it’s time for somebody else to get on. However, he isn’t sold on a specific term limit for board membership.

“If you had a rule that said people had to get off after eight years maybe that would increase a success rate on diversity because people would be forced to leave, but overall I’m not sure I’m a believer in term limits for boards because I do worry about a one-size-fits-all rule for companies. Companies are about as diverse as Canadians are.”

Longhurst agrees and says the issue of term limits is a complicated one even regulators aren’t sure how to solve.

“Do you take the ‘comply or explain’ approach which is what regulators have proposed at this stage, or do you go further and impose mandatory quotas with some sort of transitioning period? That in turn has led to some resistance not only among issuers and their management but also amongst some institutional investors who are concerned about what a one-size-fits-all approach would do,” she says.

On the plus side, there was a significant jump in the percentage of Canadian boards that put say-on-pay resolutions forward in 2013 — just over 80 per cent of TSX 60 issuers, compared to just over 50 per cent in 2011.

Longhurst says the continued influence of shareholder advisory firms like Glass Lewis & Co. LLC and Institutional Shareholder Services Inc., who are “unequivocal” on their perspective that say-on-pay votes should be held annually, bolstered by corporate governance watchdogs like the Canadian Coalition for Good Governance in Canada and the U.S., has all added further pressure to hold the advisory vote.
All of that peer pressure combined with the fact say-on-pay voting has become a good “early warning” signal for companies has served to boost the number of companies putting the vote forward.

“While some issuers would prefer not to hold them there is some utility to issuers in terms of providing early warning to them where there may be dissatisfaction among shareholders and ideally being able to respond to them before more aggressive tactics are taken by their shareholders,” she says.

Leblanc says proxy access is another governance issue missing from the report.

“Some of the big-ticket items the governance community is talking about are noticeably absent from this report including proxy access — where three per cent of the shareholders own three per cent of the company and can nominate up to 25 per cent of the board in an uncontested election. It’s a shareholder concern but not a management concern — management pushes back on proxy access — they don’t want it but certainly in the investor community it is front and centre,” he says.

What both Ainley and Leblanc agree on is while publicly traded TSX companies are facing both peer and regulatory pressure to improve transparency and adopt governance best practices, some of the bigger scandals of the last year included Crown corporations. There were some egregious examples of a lack of best practices at organizations like Ontario Power Generation Inc. and ORNGE.

“It’s even more important to be transparent with those organizations — they should err on the side of much more openness and transparency and selection of directors,” says Leblanc.

“When you go to their (OPG) web site the background of their directors, the tenure and competency and skills — I didn’t see a whole lot and that’s a red flag. Generally when you have good governance, you want to disclose it and when you don’t see it there’s an inference you may not have it.”

The Crown Investment Corp. of Saskatchewan — the holding company for the province’s commercial Crown corporations — asked Leblanc to create tools for all its Crown corporations so each one has to assess the board and committees and individual directors. The equivalent doesn’t exist in Ontario.

“Business people in Ontario look at Crown corporations here and say, ‘They aren’t even doing it themselves even though they are leveling it all on us,’” he says.

Leblanc says it has been his experience in assessing Crown boards that many of the directors “just shouldn’t be there.” He says there needs to be a clean up of the governance of Ontario Crown corporations, hospitals, and universities.

“Any entity receiving public money needs to rethink how it appoints its directors and is it doing it based on competencies and what are the powers of the board?”

Ainley says he was “terribly disappointed” to hear the chairman of the board of OPG being interviewed on the radio after Ontario’s auditor general issued its scathing report of OPG salaries, benefits, and pensions including those of executives of the government-owned utility.

“He was terribly defensive — like it was someone else’s organization — when you only have one shareholder you ought to be able to figure this stuff out,” he says.

“That responsibility — especially in a government-owned company — is pretty much squarely in the bailiwick of the chairman and the chairman of the board. You should be ahead of the curve on diversity, ahead of the curve on governance, and say on pay is a little odd when you have one shareholder so it’s more being a standard bearer for corporate governance/board governance. Board oversight of executives is the least we would expect in our Crown corporations.”

Leblanc says Crown boards are political appointees who largely don’t want to ruffle feathers. Even the pay for directors needs to be transparent, he says.

“I didn’t see it with eHealth, I didn’t see it with OLG, which was even worse, and the ORNGE scandal — I think the lack of state governance is going to be an election issue because you have ministers who oversee multiple companies so the question is how do you oversee the governance? The ministers have the prerogative.”

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