Trends in Corporate Governance Best Practices · 2014. 8. 15. · Trends in Corporate Governance...

Trends in Corporate Governance

Best Practices

CSCS Annual Conference - August 2014

Christopher A. Chen

Mathé Grenier

2© 2014 Hay Group. All rights reserved

The approach we took:

The 2013 CSCS – Hay

Group Corporate

Governance Practices

Survey

What we found:

Reflecting the key trends of corporate governance in Canada

Insights into two top

Board matters:

Mitigating risk in

succession planning

and executive

compensation

What we will cover in 60 minutes

Three areas of focus:

01 02 03


About Hay Group

Established in

1943 in

Philadelphia

International

presence with

87 offices 49countries

Approximately

3,000employees

worldwide

Top 50 Global

consulting firm

Over

10,000 clients

worldwide

#1 in Leadership

Development

Areas of

expertiseinclude: Reward Services

Leadership & Talent

Building Effective

Organizations

Employee Surveys

Productized Services

2013 survey approach

1


Survey methodology

What is it?

CSCS and Hay Group 2nd annual Corporate Governance practices

Survey

Online surveyConducted with over 100

companies across

Canada

Detailed

interviews With Corporate

Secretaries of 19

companies

CSCS Excellence

in Governance

awardsResults used to assess

entries into nomination


Participant background

0% 5% 10% 15% 20% 25% 30%

Pharmaceutical, Medical & Health

Utilities

Professional Services

Mining & Extraction, Petrochemical

Financial Services & Insurance

Top 5 industries

30%

19%30%

7%

14%

Respondents by ownership structure

Publicly traded

Privately held

Not-for-profit

Crown Corporation

Other

60%12%

13%

8%

7%

Respondents by number of employees

0-500

501-1,000

1,001 - 5,000

5,001-10,000

10,001-100,000

The role of the corporate secretary

“At regular Board and Committee meetings, the corporate secretary is knowledgeable of all discussions…this minimizes gaps in information and insight into both internal and external situations.”

“The corporate secretary is crucial to ensuring the Board is fully prepared and informed.”

2Corporate governance trends


Gaining perspective

Focus of our research

Diversity policy

Director recruitment

Boardroom Diversity

CEO succession & evaluation

Regulatory compliance

Risk Management and

Executive Pay

Corporate Social

Responsibility Sustainability

Environmental Governance

Ethics

Technology and Board

Operations Governance maximization processes

Advancements in technology

Stakeholder engagement

Assessing corporate

governance trends


What are your most significant

corporate governance issues?

Risk management and oversight continues to be top of mind for

Canadian Boards

0% 10% 20% 30% 40% 50% 60%

Independent board leadership

CEO succession planning

Executive compensation

Amount of disclosure

Board diversity

Dynamic regulation compliance

Risk Management and oversight

% of responses

Most significant corporate governance issue


What are the top board matters?

0%

5%

10%

15%

20%

25%

30%

% o

f re

sp

on

se

s

What are the top 3 board issues for the corporate secretary? (1 being most important)

1

2

3


What are the top concerns for CEO’s?

Globally, Human Capital

is decisively the most

important challenge

for CEOs .

There is a clear recognition among

CEO’s that Human Capital is

the engine of the

enterprise.

2.1Governance Trends in Corporate Social Responsibility


Trends in Corporate Social

Responsibility

What we explored

1 2 3CSR policies and

practices

Environmental

governance

Ethics oversight


Key trends in CSR

Formal CSR

policies are not

yet common

practice42% have no formal CSR policy

19% indicate having a “fully

implemented” CSR policy

Senior management

typically responsible

for formulating CSR

strategy

What we found

19%

15%

24%

42%

Formal CSR policy

Yes, fullyimplemented

Yes, beingimplemented

No, but underconsideration

No


Key trends in CSR

Formal environmental

policies are more

common51% indicate having a formal

environmental policy

Sustainability initiatives

include:

Improving energy efficiency

Improving environment around

facilities

Enhancing impact on local

communities

Cutting emissions or pollutants

What we found

51%

49%

Formal environmental policy

Yes

No


Key trends in CSR

Ethical oversight is shared amongst the Audit

committee, entire Board, or

Corporate Governance

committee

70% indicate

having a

Whistleblower

policy80% of respondents engage in

employee training and

sensitization to ethical

requirements

What we found

70%

30%

Whistleblower policy

Yes

No

41%

39%

20%

Ethical training

Yes, they are trainedand monitored

Yes, they are trainedbut not monitored

No training isconducted


CSR initiatives

Many of your peers are investing in CSR initiatives and

incorporating into overall business strategy

Trends include:

Sustainability committee

Charitable wellness programs

IT related operations

Generating awareness

Fostering culture for CSR

2.2Governance Trends in Technology & Board Operations


Trends in Technology & Board

Operations

What we explored

1 2 3Advancements in

technology

Board operations &

governance

maximization

processes

Stakeholder

engagement


Key trends in Technology & Board Ops

Technology is

increasingly more

common for

communication Distribution of Board material

Documentation management

Communication with

institutional shareholders

Communication with retail

shareholders

What we found

0% 10% 20% 30% 40% 50% 60% 70%

In-person at board meetings

Through mailing of hardcopies

Using tablets or other wirelessdevices

Through secured email

Through a Board portal

% of responses

Distribution of Board materials


Advantages of Technology in the Boardroom

Secure email and portals

Streamlines information

Efficiency of meetings

Tracking and monitoring of shareholder communications

Remote Board meeting participation

Key benefits of advances in technology include reduced

environmental impact, protection of sensitive information and

more effective communication



Most boards recognize the value

of formal board

evaluations &

director educationto enhance the overall board

operations

What we found

201050

New director orientation recognized to

enhance overall board effectiveness

76%

Respondents that

have a formal

policy on board

evaluation 65%Director education

policies are less

common and

participation varies

Program

attendance

+ 75% -25%

Yearly most

typical


Board Meetings

16%

78%

6%

Provision of Board materials to Board members

Less than 5 days

5-10 days

10 - 15 days

2%

49%

30%

19%

Number of board meetings

0-2 times

3-6 times

7-10 times

>10 times

Out of our survey respondents, the majority conduct board meetings

between 3 and 6 times annually, closely followed by organizations who

conduct them between 7 and 10 times annually.



Stakeholder

Engagement

Increasingly common for

Board members to

communicate with

stakeholders

Strong internal coordination

between investor

relations and the

corporate secretaryenable effective communication

with stakeholder groups

What we found

0%

10%

20%

30%

40%

50%

60%

70%

0-2 times 3-6 times 7-10 times >10 times

% o

f re

sp

on

ses

Number of times per year

Board communications with stakeholders

2014

2013


Stakeholder Engagement

The Problems

Stakeholder communications require

time and attention

Different messages and issues from

opposing stakeholder groups, conflicts

can arise from helping either group

Directors need to be conscious of the

legal issues when engaging with

stakeholders, and should be coached

beforehand

Stakeholders may not always want to

engage with directors if there isn’t a

problem

The Benefits

Better understanding of what

stakeholders are looking for

Staying involved with stakeholders helps

to promote economic development and

achievement of developmental goals

Forming partnerships with stakeholders

can build credibility

Engaging with stakeholders and

creating open dialogue allows

organizations to maintain transparent

relationships

2.3Governance Trends in Boardroom Diversity


Trends in Boardroom Diversity

What we explored

1 2Diversity policies Director recruitment

Diversity in the boardroom

“In our hiring program, if all things equal, we will often give the position to the candidate who has diversity characteristics.”

“Diversity isn’t necessarily about ethnicity or gender…diversity is about creating the right Board, full of the right people with qualifications, skills, experience and background that can add value to executive management.”


Key trends in Boardroom diversity

Proportion of boards with

Policies on

boardroom

diversityare increasing.

What we found

201050

76%

Respondents that

have a formal

policy on board

diversity 40%Year over year, the

proportional

increase is

encouraging

- 50% +75%

2013 2014


Facts & figures within Canadian

Boardrooms

Boards with female representation 80%

Boards with visible minority representation 41%

Common age of the youngest director Over 40 years old

Common age of the oldest director 70-75 years old

Simple average age of the Board directors 56-60 years

Boards including non-residents of Canada 32%

1% 4%

41%54%

Percentage of women serving on Board

Above 75%

51% to 75%

25% to 50%

Below 25%

0% 2%

13%

85%

Percentage of people of a visible minority serving on boards

51% to 75%

25% to 50%

Below 25%


Key trends in Board recruitment

The factors having the

most influence on

being considered for a board

role are by far industry

experience &

being known for

industry-related

expertise

What we found

201050

76%

65%Program

attendance

Yearly most

typical

0%

10%

20%

30%

40%

50%

60%

70%

% o

f re

sp

on

ses

Most important Board recruitment criteria (1 being most critical)

1

2

3

Diversity in the boardroom

“We are supportive of the recent Ontario Securities Commission initiative, because it strikes the balance with their ‘comply or explain’ approach.”

“We are hopeful that quotas will not be required, even though some commentators express concerns of plateau in terms of Boardroom diversity.”

“Quotas are a terrible way to increase diversity. We applaud those interested in agencies like Catalyst Canada who go out to encourage people to adopt these best practices.”

2.4Governance Trends in Risk Management & Executive Pay


Trends in Risk Management &

Executive Pay

What we explored

1 2 3Regulatory compliance

and the impact of

legislation

Executive pay CEO performance

evaluation and

succession

Risk management and oversight is by far the most significant issue companies face


Key trends in risk management

Best practice

measures

dealing with risk

management Risk registry

Reporting of risk

Corporate risk profiles

What we found

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Environmental risk

Personnel risk

Technological risk

Compliance-related risk

Strategic risk

Reputational risk

Financial risk

Operational risk

% of responses

Most critical risk


Risk Management across Canada

65%

We have a well-articulated Risk committee at the Board level that is dedicated

to looking at the organizational risk and ensuring that systems, policies,

tolerances and limits are in place to control and manage risk

47%

15%

17%

21%

Formal risk policy

Yes, fully implemented

Yes, being implemented


No

38%

18%

17%

27%

Enterprise Risk Management program

Yes, fully implemented

Yes, being implemented


No

”“


Impact of legislation

The Negatives

Regulations can be very limiting for

smaller organizations that lack the

adequate/appropriate resources

Directors now have to understand

multiple pieces of legislation and

regulation

Timely and costly for management

to comply

There is no global standard

Difficult to achieve balance between

easy to understand language and

maintaining legal compliance

The Positives

Increased transparency strengthens

accountability and shareholder

understanding

Transparency provides better

guideline in overall corporate

governance

Legislation brings standardization

across industries on corporate

disclosures

Adds clarity on expectations and

standards of corporate governance


Impact of Legislation2013 – 2014 opinion comparison

The percentage of respondents with positive votes has increased from

43% to 55%

0%

10%

20%

30%

40%

50%

60%

Positive Neutral Negative/ Room forimprovement

% o

f re

sp

on

ses

Impact of corporate governance legislation on Board operations

2014

2013

The voice of the corporate secretary on the impact of legislation.

“I don’t think it’s the legislation that’s driving the changes, but rather the “quasi-legislative” third parties, such as the ISS, Globe and Mail’s Board Games, and the CCGG. Their thoughts on leadership and setting of expectations is the most effective force in enhancing corporate governance in Canada.”


Key trends in regulatory compliance

Regulatory

compliance rates

second in importance, yet

only 42%Have a formal regulatory

compliance policy

What we found

42%

58%48%

Formal policy to ensure regulatory compliance

Yes

No

03Managing risk – protecting and enabling performance


Key trends in executive pay

Over 50% review

executive

compensation on

a regular basis

External compensation

consultants, the CEO, and

proxy advisory firms

Most heavily

influence

executive pay

What we found

0% 10% 20% 30% 40% 50% 60% 70% 80%

Other

Media/public opinion

Government legislation

Investor views

Corporate governance codes

Market practice

Performance

% of responses

Factors affecting executive pay design


Key trends in performance metrics

Executive

compensation

linked to

organization

performance for both short and long term goals

occurs in some organizations

Pay at risk increases in

proportion to an executive’s

accountability to deliver on their

goals

What we found

0%

10%

20%

30%

40%

50%

60%

70%

80%

Financialgoals (e.g.

Profit,revenue)

Individualcontribution

Operationalgoals

Customerfeedback

% o

f re

sp

on

se

s

Performance measures linkage to incentives

Large impact

Some impact

No impact


Roadmap to simpler executive pay

So how do we get there?

Drivers of complexity: What causes

complexity in executive reward?

Pointing the way: Creating the right

conditions

Routes to simplification: What steps can

organizations implement?

On the right road: What is the right simplicity

for your organization?

Simplicity matrix

Many stakeholders involved in executive reward are calling for pay to be

made simpler, including compensation committees, investors/funders/

members, and executives themselves


Guidelines to achieving simplification

Be clear about what simplification means to the organization

Accept trade-offs between simplicity and effectiveness

Set clear, specific aims and principles about how pay should operate

Focus on the business

Don’t cascade complexity

Be honest with stakeholders

1

2

3

4

5

66


Key trends in CEO performance

evaluation and succession

Expanding the

board’s focus from traditional remuneration

and nominating committees

to a human

capital committee continues to be a key

challenge

What we foundRespondents that

have a CEO

performance

evaluation policy 78%Respondents that

have a CEO

succession policy

49%Respondents that

review

succession plans

annually 49%

CEO & executive succession is not about ‘replacement’, but rather risk mitigation in assuring business continuity – and therefore a business (and Board) imperative.


The 7 steps to ensuring a robust

Succession Plan

Identify mission critical roles

Define future role requirements

Identify succession candidates/high potentials

Objectively assess internal candidates

Actively develop talent bench strength

Identify and manage succession risks: commitment and retention

Sustain momentum over the long term

1

2

3

4

5

6

7


CEO & executive leadership

succession framework

Develop future CEO/ executive role requirements

Assess internal candidates against CEO/executive role profile

Develop CEO/executive talent

Develop CEO transition

plan/executive on-boarding

strategies

Develop plans forinternal

candidates

Assess internal vs.

external candidates

StrategyBusiness

model

Corporate culture

Primary objective: to build the leadership bench strength to execute on future strategy


Mission Critical Staffing for

Leadership Continuity

56%24%

11%

9%

Estimated executive turnover

Less than 10%

10% to 20%

20% to 30%

More than 30%

2%

33%

65%

Ability to fill mission critical roles

Little extent

Moderate extent

Great extent

Over the years, there has been more interaction between the Board and non-

executives, where they are able to present issues to the Board…if we see

potential in a candidate we make sure they have the opportunities to build

rapport with the Board.

“”

Succession planning fits hand in glove with business strategy

If you don’t have a strong leadership bench, your organization is at risk of not executing on your strategy.


The 7 derailers to a robust

succession plan?

Succession is an HR issue

Succession planning as a yearly event

The black box of succession planning

The quest for the “heir apparent”

The 9-box crystal ball

Potential is not a state

Cloning of “mini-me’s”

1

2

3

4

5

6

7


Looking forward

Top 5 most voted corporate governance trends for 2015:

Boardroom

diversity Focus on

risk

management

(including

Human

Capital risk)

Increased

reporting

and

regulation

Executive

and

director

pay

Director

training

and

education

Questions?

?


Who to contact

Christopher A. ChenChristopher is National Director for Executive Compensation, based in Toronto ON,

and sits on Hay Group’s Executive Reward Global Leadership Team and the

Canadian Management Committee. He advises clients on supporting stakeholder

value through effectively aligning organizational strategy to executive compensation

Email: [email protected]

Tel: +1 416 815 6385

Mathé Grenier

Mathé Grenier is a Hay Group Director based in Vancouver, BC, supporting clients

across Western Canada. With a focus on Board of Directors and executive level

solutions, Mathé specializes in leadership and organizational transformation,

succession planning, leadership development, board effectiveness, executive

coaching and strategy facilitation. She works to create alignment, resilience and

motivation at all levels to facilitate strategy execution.

Email: [email protected]

Tel: +1 778 945 29175


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Trends in Corporate Governance Best Practices · 2014. 8. 15. · Trends in Corporate Governance...

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Transcript of Trends in Corporate Governance Best Practices · 2014. 8. 15. · Trends in Corporate Governance...