Building High Performance Boards

The Canadian Coalition for Good Governance’s (CCGG) has issued a revised report on Building High Performance Boards. Here’s a quick overview with just a few examples of best practices highlighted — the report contains many more:

Facilitate shareholder democracy

Allow shareholders to vote for individual directors; no slates. All directors should be up for election each year – board terms should not be staggered. Adopt a majority voting policy for director elections, using language that is substantially similar to the CCGG model policy (available at www.ccgg.ca). Get shareholder approval before issuing 25% or more of the shares of the company as part of a transformational transaction. Report voting results on SEDAR within 5 business days, indicating the actual number of votes cast for, against and/or withheld for each resolution.

Ensure at least two thirds of directors are independent of management

Make sure at least two-thirds of directors are “independent.” Have a formal board policy that limits the number of board and committee director interlocks on the board. Report all board and committee interlocks to shareholders.

Separate the roles of Chair and Chief Executive Officer

The independent members of the board should appoint an independent board chair to function in a non-executive capacity, with a defined mandate and role. The board chair should be prepared to invest a considerable amount of time and effort, and should ideally be independent of the controlling shareholder, where there is one.  The independent chair (or independent lead director) should set board agendas with the CEO and other directors and be responsible for the quality of the information sent to directors. The CEO should be required to leave the board when he or she retires. In cases where an incoming CEO has been recruited from outside the company, the board can consider keeping the former CEO as a board member during a transition period. The board should establish an annual review process for the chair and report on it to shareholders.

Ensure that directors are competent and knowledgeable

Each director’s career experience and qualifications should be described in the proxy circular. Some directors should have financial accreditation and/or be financially literate.  All directors should demonstrate well developed listening, communicating and influencing skills so they can actively participate in board discussions and debate.  We believe that directors who hold a full-time executive position should have only one or two outside public company directorships (recognizing that there can be value in a senior executive gaining board experience in another or related industry) and that directors who are not employed full time should generally hold no more than four outside corporate directorships that take up a significant amount of time.

Maintain and disclose to shareholders a ‘matrix’ of director talents and board requirements to identify skill gaps on the board and to create a board built on a diversity of background, skills and experience. Disclose each director’s relevant skills. Build and maintain an “ever-green” list of suitable candidates to fill planned or unplanned vacancies. Have a plan in place for the orderly succession. Establish a continuing education program for directors to update their skills and knowledge of the company, its businesses and key executives, and to address ongoing and emerging issues in the functional areas of the board (like corporate governance, audit, compensation practices and risk management). Disclose to shareholders the education programs directors participate in every year.

Ensure that the goal of every director is to make integrity the hallmark of the company

To deepen their understanding of developing ethical issues, directors should read appropriate literature or attend seminars and then act accordingly. When meeting with company employees (including the CEO and other senior officers), directors should take the opportunity, whenever possible, to emphasize the importance of integrity. Directors should demonstrate a proven understanding of fiduciary duty and their role as fiduciaries.

Emphasize the importance of integrity during in-camera sessions, and consider whether the CEO and other senior officers demonstrate the right “tone at the top” to ensure a culture of integrity throughout the organization. + many more

Establish mandates for board committees and ensure committee independence

Hold in camera sessions with independent directors only, as a regular part of all committee meetings. Review committee charters every year and amend or confirm the mandate and procedures based on information received from the board and committee evaluation processes. Make sure every committee includes directors of diverse backgrounds and at least one director with significant expertise relevant to the committee’s role. Plus, many recommendations for individual committees.

Establish reasonable compensation and share ownership guidelines for directors

Require directors to own the equivalent of five years’ annual retainer in the form of shares or deferred share units within five years of becoming a director. Boards may wish to establish interim targets (e.g. 3 times annual fees after 3 years on the board) to allow the director to work toward the total requirement.

Evaluate board, committee and individual director performance

Make sure the performance review process assesses a director’s skill set against the company’s strategic plan, environment and needs. Determine and document the kinds of events that would normally lead a director to resign from the board (not meeting attendance expectations, age or change in principal occupation or place of residence, for example). Evaluate the performance of individual directors every year using a confidential peer-review survey. Disclose the performance review processes in the proxy circular in enough detail to demonstrate that there is a strong and viable system in place.

Oversee strategic planning, risk management and the hiring and evaluation of management

Financial institutions should establish a separate risk committee, made up of independent directors, that focuses on the governance of risk. Another model has every committee addressing the risks relative to their mandate within each committee then bringing its perspective to the entire board. Disclose to shareholders the board’s analysis of the primary risks of the business and describe how the corporation is monitoring and mitigating the risks.

Assess the Chief Executive Officer and plan for succession

Review succession plans for the CEO and other senior executives once a year (or more frequently) and review with the CEO the performance of his or her direct reports.

Develop and oversee executive compensation plans

The consultant should align its interests solely with the interests of the corporation and not have any other conflicting interests. The independent consultant should earn most (if not all) of its fees from the company for work performed for the compensation committee. Link compensation and risk management.

Report governance policies and initiatives to shareholders

Report in the proxy circular how and to what extent the company complies with each of the guidelines in this document. Our disclosure best practices documents (which are available at www.ccgg.ca) include many examples of effective disclosure. Have the chair of each committee available to answer questions at the Annual General Meeting.

Engage with shareholders within and outside the annual meeting

Provide opportunities for shareholders to have access to board members outside of the annual meeting to discuss issues that concern either party. Add an advisory shareholder “Say on Pay” resolution to each annual meeting agenda.

See also, Restoring Trust in Corporate Governance, Posted by Benjamin W. Heineman, Jr., Harvard Law School Program on Corporate Governance and Program on the Legal Profession, on Wednesday January 27, 2010.