New Canadian compensation rules make work for issuers in coming proxy season

By Guest Contributor
August 17, 2011

By John Mackie

Aug. 16  (Business Law Currents) With the recent announcement by the Canadian Securities Administrators (CSA) that changes in executive disclosure requirements will apply for financial years ending on or after October 31, Canadian issuers may want to do some advance planning in order to avoid last minute scrambling in the New Year.

The proposed amendments to Form 51-102F6 – Statement of Executive Compensation range from simple drafting changes and clarifications to new substantive requirements, and reflect both the proposal issued last November and the comments received in response.

Perhaps the biggest changes contemplated by the new form are the obligation to disclose an issuer’s risk management practices vis-à-vis compensation policies and practices, and the emphasis placed on discussions of performance targets. For issuers, the former may require stepping onto unfamiliar ground, and the latter may test their willingness to share financial planning data with the street at large.

As regards risk management practices, the new form will require each issuer to disclose whether or not its board of directors, or a committee of the board, considered the risks associated with the company’s compensation policies and practices. If so, the issuer is required to provide additional disclosures regarding mitigation practices and risks considered “reasonably likely to have a material adverse effect on the company.”

The current practice on disclosing risk management practices in this area is mixed, with many issuers providing no information, or little information – quite possibly because many boards may not have formally turned their minds to the matter. Many companies continue to focus on the central purpose of compensation plans – to attract and retain qualified individuals at a competitive cost, and to ensure that they are motivated to create shareholder value. Other issuers, such as Toronto’s Just Energy, which sells natural gas and electricity to residential and commercial customers, have at least begun the process of assessing compensation-related risk.

In Just Energy’s most recent proxy circular, the company notes that, in the previous year, the Compensation Committee of the Board implemented formal processes for ensuring that risk is appropriately considered in the company’s compensation plans. On the issue of mitigation, the company comments that:

…we believe we have practices in place, such as significant common share ownership requirements for both directors and executive officers, trading restrictions, requirements to receive a significant percentage of annual cash bonuses in securities which vest over three years subject to continuing employment on each applicable vesting date and long term hold requirements for NEO’s to whom long term retention restricted share grants…to mitigate the risks associated with our compensation policies and programs…

BCE Inc., Canada’s largest communications company, frames risk assessment as an exercise intended to ensure compensation policies and practices do not encourage undue risk-taking on the part of its executives. On the issue of mitigation tools, it references clawback provisions, share ownership guidelines, trading restrictions and a deferred share unit plan.

One of the things issuers will need to remember as they examine compensation-related risk is that risks can take several forms, such as plans that: encourage excessive risk as compared to the organizational return; lack a cap, thus exposing a company to massive expenses; or focus on short-term return rather than long-term value. Indeed, issuers must also balance risk in this area with other organization risks, as illustrated by Lone Pine Resources, which spun-out of U.S. parent Forest Oil by way of an IPO in May, raising net proceeds of $178 million.

In Lone Pine’s prospectus, its disclosures on compensation speak to the experience at Forest, and are addressed in the form of a Q&A.

Referring to Forest’s practices, Lone Pine states that the company’s compensation programs “have been reviewed in terms of the long-term best interests of shareholders,” and the Compensation Committee of Forest believes that “executive pay practices comprise adequate financial security and incentives for executive officers to achieve the optimal short-term and long-term objectives of Forest.” For Forest, the compensation-related risk is to be examined in the context of the organizational risk of having officers lacking security or incentives sufficient to motivate them appropriately.

The other major topic addressed by the new disclosure requirements concerns performance goals or targets. The form already requires issuers to disclose performance goals based on objective, identifiable measures, or, where the goals are subjective, to describe them. In the past, however, an “out” was available where “a reasonable person would consider that disclosing them would seriously prejudice the company’s interests.” In addition, there was no obligation for an issuer to disclose when they were relying on the exemption.

Perhaps concerned that the open-ended exemption invited abuse by issuers, the revised form requires issuers to specifically indicate when they are relying on the exemption, and explain why disclosure would seriously prejudice the company’s interests. On that point, the CSA has also indicated in the new form that:

For the purposes of this exemption, a company’s interest’s are not considered to be seriously prejudiced solely by disclosing performance goals or similar conditions if those goals or conditions are based on broad corporate-level financial performance metrics which include earnings per share, revenue growth, and earnings before interest, taxes, depreciation and amortization. This exemption does not apply if it has publicly disclosed the performance goals or similar conditions.

As in the case of compensation-related risk, many issuers presently provide little in the way of meaningful disclosure on the issue of performance goals. This is notwithstanding the fact that the obligation to disclose such goals was already contained in the form. There are, however, a number of issuers which do provide details regarding the targets against which executive performance is measured. Sporting goods retailer The Forzani Group, for example, which Canadian Tire is in the midst of acquiring, addresses the performance goals of each of its named executive officers in the company’s recent annual meeting proxy circular.

In discussing the compensation of Forzani’s chief financial officer, the company discloses that his objective vis-à-vis financial results was to deliver earnings per share of $1.17 and improve return on equity (ROE) by at least 100 basis points over Fiscal 2010. Both objectives were apparently met. On a less objective front, he was also responsible for implementing a “meaningful share buyback” – another goal that was achieved in fiscal 2011. Forzani similarly reviews the objectives of each individual officer, summarizing the various objectives and briefly indicating whether the objective was satisfied or not.

Aviation simulator company CAE goes another step in its discussion of the financial performance metrics used to calculate bonuses under the company’s short-term incentive plan (STIP). Indeed, the company notes that these “financial metrics are easily measured and the performance thereof can be tracked in our Management Discussion and Analysis (MD&A).” It’s an investor-friendly approach to disclosure that provides significant transparency on the compensation front.

CAE also provides a table specifying each of the company’s financial performance targets, such as book to sales ratio and free cash flow. For each, the threshold at which bonuses will be paid, performance target and maximum cap are identified, as are the actual achievement and actual payout. Several performance indicators which are somewhat subjective – such as implementing a “global talent management process” – comprise 25 percent of the STIP payout. For each, the company provides a brief description.

One aspect of the revised form that may prove a challenge for some issuers is the fact that the CSA has made it clear that they do not consider serious prejudice to result solely from the disclosure of performance goals based on broad corporate-level financial performance metrics. As a case in point, consider Empire Company of Stellarton, Nova Scotia, which owns food retailer Sobeys and the Empire Theatres movie chain, and is the largest shareholder in Crombie REIT.

Empire Company notes that the company’s executives participate in an Annual Management Incentive Plan (AMIP), pursuant to which awards are based on the attainment of a board approved budget for earnings before capital gains and other items (“operating earnings” which is calculated as net earnings before capital gains and other items, net of tax). The AMIP target for executives responsible for regional and divisional business unit operations is dependent upon the achievement of sales and profitability targets specific to their business unit.

The company does not provide additional detail, apparently because of the belief that “more detailed disclosure of executives’ or Company goals would assist in providing earnings guidance to the market, which Empire does not do.”

Empire raises an interesting point, and one that issuers will have to face as they develop the proxy circulars for the next AGM season – disclosure of performance goals that have a prospective aspect, for example, multi-year improvements in ROE – could indeed be seen as a form of earnings guidance.

There is another concern which issuers may wish to take note of, as illustrated by the comments published in connection with the original CSA proposal. Even where goals are disclosed on a purely historical basis (i.e. the issuer targeted $X in revenue, and achieved $Y), investors and competitors will gain insight into the issuer’s planning processes. As an example, should a revenue target be substantially higher than that actually achieved, investors may question whether the board or management truly understand their markets. In the event the numbers suggest a revenue boost from a new product line which fails to crystallize, that might also benefit a competitor.

These questions regarding risk and disclosure are ones issuers will need to examine as they develop their proxy disclosures for the 2012 annual meeting season, and will require some advance planning, in order to ensure boards have sufficient time to consider them appropriately.

(This article was first published by ThomsonReuters’ Business Law Currents, a leading provider of legal analysis and news on governance, transactions and legal risk. Visit Business Law Currents online at http://currents.westlawbusiness.com.)

 

 

1,399 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

Hi my loved one! I want to say that this post is awesome, great written and include approximately all significant infos. I would like to look more posts like this .

Pretty nice post. I just stumbled upon your weblog and wished to mention that I’ve truly enjoyed browsing your blog posts. In any case I will be subscribing in your feed and I am hoping you write again soon!|

Wow that was odd. I just wrote an incredibly long comment but after I clicked submit my comment didn’t show up. Grrrr… well I’m not writing all that over again. Anyway, just wanted to say fantastic blog!|

It is in reality a great and useful piece of info. I am satisfied that you shared this helpful information with us. Please keep us informed like this. Thank you for sharing.

Hi, i think that i saw you visited my website so i came to “return the favor”.I am attempting to find things to improve my site!I suppose its ok to use some of your ideas!!

Hello. Great job. I did not expect this. This is a splendid story. Thanks!

You can definitely see your enthusiasm within the work you write. The world hopes for more passionate writers such as you who are not afraid to say how they believe. At all times go after your heart.

I precisely needed to say thanks once again. I am not sure the things I would have handled without the entire smart ideas revealed by you directly on such a topic. It had been a real troublesome setting for me personally, however , being able to view a new specialised avenue you managed the issue took me to cry for fulfillment. I am just grateful for this service and sincerely hope you comprehend what a powerful job your are getting into training people today through a site. Probably you’ve never met all of us.

Attractive section of content. I just stumbled upon your weblog and in accession capital to assert that I acquire in fact enjoyed account your blog posts. Any way I will be subscribing to your feeds and even I achievement you access consistently rapidly.

fantastic put up, very informative. I ponder why the opposite specialists of this sector don’t understand this. You should continue your writing. I’m sure, you’ve a huge readers’ base already!

You are a very clever person!

I have been surfing online more than 3 hours today, yet I never found any interesting article like yours. It is pretty worth enough for me. In my view, if all website owners and bloggers made good content as you did, the internet will be much more useful than ever before.

I have been browsing on-line greater than three hours nowadays, but I by no means discovered any interesting article like yours. It is pretty price enough for me. In my opinion, if all webmasters and bloggers made excellent content as you did, the net will probably be much more useful than ever before.

Great tremendous things here. I¡¦m very satisfied to look your article. Thanks so much and i am looking ahead to touch you. Will you kindly drop me a mail?

Hello.This post was extremely remarkable, particularly because I was searching for thoughts on this issue last Tuesday.

Thank you a bunch for sharing this with all of us you actually understand what you are talking about! Bookmarked. Please additionally visit my site =). We will have a link exchange arrangement between us!

Great post. I was checking constantly this weblog and I’m inspired! Extremely helpful info specifically the last phase :) I handle such info a lot. I used to be seeking this certain info for a long time. Thanks and good luck. |

I’ve been surfing on-line more than three hours these days, but I by no means discovered any interesting article like yours. It’s lovely price sufficient for me. Personally, if all site owners and bloggers made good content as you probably did, the web might be much more helpful than ever before.|

I just want to mention I’m beginner to blogging and site-building and truly loved this web page. Likely I’m planning to bookmark your blog post . You actually have good article content. Thanks a bunch for sharing with us your blog site.

Hi there, its fastidious piece of writing regarding media print, we all be aware of media is a wonderful source of information.|

Hello there! This blog post could not be written any better! Looking at this post reminds me of my previous roommate! He continually kept preaching about this. I’ll forward this post to him. Pretty sure he’ll have a very good read. Thanks for sharing!|

Now I am ready to do my breakfast, when having my breakfast coming over again to read more news.|

hi!,I really like your writing very so much! percentage we keep in touch extra about your article on AOL? I need a specialist in this space to resolve my problem. May be that is you! Looking ahead to peer you.

I am so happy to read this. This is the type of manual that needs to be given and not the random misinformation that is at the other blogs. Appreciate your sharing this greatest doc.

I truly wanted to compose a quick word so as to appreciate you for all of the remarkable concepts you are showing here. My time consuming internet research has at the end of the day been paid with good insight to write about with my guests. I ‘d mention that most of us site visitors are very much endowed to live in a perfect place with very many marvellous individuals with good suggestions. I feel pretty fortunate to have come across your entire web pages and look forward to many more cool moments reading here. Thank you once again for all the details.

I’m very happy to read this. This is the type of manual that needs to be given and not the accidental misinformation that is at the other blogs. Appreciate your sharing this greatest doc.

As a Newbie, I am continuously searching online for articles that can benefit me. Thank you

I not to mention my friends came looking through the good helpful tips on your website and so immediately I had a terrible feeling I never expressed respect to the site owner for those secrets. Most of the people are already consequently joyful to study all of them and now have simply been making the most of these things. Many thanks for turning out to be really considerate as well as for considering such very good tips most people are really desperate to be aware of. My sincere regret for not expressing appreciation to sooner.

Wow! This can be one particular of the most helpful blogs We have ever arrive across on this subject. Actually Magnificent. I’m also an expert in this topic so I can understand your effort.

I would like to thank you for the efforts you have put in writing this site. I’m hoping to check out the same high-grade content by you in the future as well. In truth, your creative writing abilities has inspired me to get my own website now ;)|

whoah this weblog is great i like studying your articles. Keep up the good paintings! You recognize, lots of people are searching round for this information, you could aid them greatly.

I savour, cause I found exactly what I was taking a look for. You have ended my 4 day lengthy hunt! God Bless you man. Have a nice day. Bye

You are a very clever individual!

Thank you for the sensible critique. Me & my neighbor were just preparing to do a little research on this. We got a grab a book from our local library but I think I learned more clear from this post. I am very glad to see such magnificent information being shared freely out there.

There is visibly a lot to identify about this. I feel you made some nice points in features also.

It’s truly very complicated in this active life to listen news on Television, so I just use web for that reason, and obtain the latest news.|

Wow, marvelous blog layout! How long have you been blogging for? you make blogging look easy. The overall look of your website is fantastic, as well as the content!

Generally I do not learn post on blogs, however I wish to say that this write-up very forced me to check out and do so! Your writing taste has been surprised me. Thank you, quite great article.|

I have fun with, result in I discovered exactly what I was taking a look for. You’ve ended my four day long hunt! God Bless you man. Have a great day. Bye

Hi, i think that i saw you visited my blog so i came to “return the favor”.I am attempting to find things to enhance my website!I suppose its ok to use a few of your ideas!!

I wish to voice my affection for your kindness for persons who need assistance with this important matter. Your real commitment to getting the message along was astonishingly advantageous and have frequently allowed individuals just like me to realize their pursuits. Your own helpful guide means so much to me and additionally to my office workers. Warm regards; from all of us.

Undeniably believe that which you said. Your favorite reason appeared to be on the internet the easiest thing to be aware of. I say to you, I definitely get irked while people think about worries that they plainly do not know about. You managed to hit the nail upon the top and defined out the whole thing without having side effect , people could take a signal. Will probably be back to get more. Thanks

Hello, Neat post. There’s an issue with your site in internet explorer, may test this¡K IE still is the market chief and a big part of other folks will miss your fantastic writing because of this problem.

I precisely had to thank you so much once again. I’m not certain what I might have achieved without the entire solutions contributed by you relating to this subject matter. It seemed to be the frightening dilemma in my opinion, however , witnessing your specialised technique you resolved that forced me to cry with joy. I’m happier for your information and as well , wish you realize what an amazing job you happen to be doing teaching many people through your blog post. Most likely you’ve never come across any of us.

What a stuff of un-ambiguity and preserveness of valuable familiarity concerning unexpected feelings.|

You made some decent points there. I looked on the internet for the subject and found most guys will consent with your website.

It¡¦s really a nice and useful piece of information. I¡¦m glad that you shared this useful info with us. Please stay us informed like this. Thanks for sharing.

Hello. fantastic job. I did not imagine this. This is a excellent story. Thanks!

Thank you, I have just been searching for info approximately this topic for a while and yours is the best I have came upon so far. But, what in regards to the conclusion? Are you sure about the supply?