The evolution of Canada’s share ownership guidelines

Aligning executive and shareholder interests has always been a key principle of executive compensation, and several mechanisms exist to ensure such a link exists. Among those, share ownership guidelines have always proven an efficient approach to ensuring that executives have enough skin in the game.

Several practices have emerged over the years to ensure these policies remain efficient and consistent with the evolving complexity of executive compensation. Among the recent practices, the Canadian Coalition for Good Governance (CCGG) has published a report on executive share ownership policies.

The report includes recommendations designed to meet the objective of rethinking how share ownership guidelines should be developed to ensure optimal shareholder alignment. Here, we assess how organizations have adapted their share ownership guidelines based on evolving market conditions, including the CCGG guiding principles (Table 1).

Table 1: Summary of the CCGG’s effective shareholding policy guiding principles

How companies are responding to the CCGG guidelines

These new guiding principles and the evolving economic context have forced organizations to re-assess (and, in some instances, re-think) the effectiveness of their share ownership guidelines. This has led several organizations to improve their share ownership guidelines. The most notable changes:

• Reviewing long-term incentive vehicles that count towards meeting the requirement level, mainly excluding performance share units in the calculations
• Adopt a retention policy that participants can’t sell shares or exercise stock options until the minimum requirement is met or after retirement
• Review the multiple (either reducing or increasing) to ensure it strikes the right balance of being realistic and adapted to the organization’s compensation policy and pay mix, and providing sufficient skin in the game
• Extend the participation to the stock option guidelines to lower levels of executives with most large Canadian organizations now extending the policy to all executive levels down to vice presidents

Only a few organizations have made the transition among the more aspirational policies (i.e. multiple of total direct compensation, forcing executives to retain a portion of vested shares or purchase shares from the cash settlement of vested long-term incentives, only including common shares). Looking at the S&P/TSX 60, we observe the following based on the most recent proxy season:

• Two organizations have adopted a multiple of total direct compensation approach
• Four organizations now only include common shares as vehicles that count towards meeting the ownership

Aligning executive and shareholder interests

While most organizations have not yet adapted their share ownership guidelines to the new CCGG principles, WTW is aware of many organizations that are currently implementing some of the new guidelines or adopting features with the objective of strengthening the effectiveness of their policies.

A good approach to preparing for this potential shift in share ownership guideline practices is to assess compliance with these new policies. Because several companies are running these analyses behind the scenes, we can expect companies to disclose improvements to their policies in the next proxy season.

Author

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Sebastién Morrissette

Senior Director, Executive Compensation and Board Advisory

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