David Beatty, managing director of the Canadian Coalition for Good Governance, believes that the shareholder’s “best line of defence” in ensuring that companies behave as good corporate citizens is to elect competent boards of directors. It is then up to those officials to hold management accountable on a wide range of issues that affect corporate success, from executive pay to accounting practices and crisis management.

“We are large investors and we want companies to succeed,” says Beatty, whose organization represents almost 50 institutional money managers in Canada and more than $1 trillion of investor assets. “We believe that boards can add value and help. We’re interested in how boards are chosen, we assess what they do and we have made a huge effort to help them do a better job.”

The CCGG has found the most effective approach is through education and “gentle persuasion,” he says, rather than strident shareholder revolt. In almost six years since its birth, the CCGG has developed materials and produced research to help corporations define and implement best practices.

“We have no interest in being yapping terriers biting at the ankles of management,” Beatty says. “We believe that corporate governance can add value and reduce risk. Our job is to increase the quality of corporate governance. Directors are responsible for aligning the interests of management with the people who own the companies — the shareholders.”

In addition to his role at CCGG, Beatty is a professor of strategic management at the University of Toronto’s Rotman School of Management and a director of its Clarkson Centre for Business Ethics and Board Effectiveness. He has had a long career in business that has equipped him to represent the large pension funds, mutual funds and money managers that are members of the CCGG. In the late 1990s, for example, he was the founding chairman of Orogen Minerals Ltd., a natural resources company based in Papua, New Guinea, and for almost 10 years prior to that, he was president of Weston Foods (Canada) Inc., a division of the George Weston Ltd. empire. He is currently on the boards of Bank of Montreal, FirstService Corp., Husky Injection Molding Systems Ltd. and Inmet Mining Corp..

In being a catalyst for positive corporate change, Beatty says that it is necessary to balance the interests of shareholders with those of management. The business world is a highly competitive arena for recruiting top talent, and hot-button issues such as management compensation are complex. It’s important to weigh how much talented senior executives are typically being paid for their work in the marketplace against the demands of the company, he says.

“Pay packages are extremely complex, involving not only salaries but incentives, bonuses, retirement packages, post-retirement benefits, and what might happen in the event of a change in control at the company,” says Beatty. “Determining executive compensation is not a job for the layman. Setting senior executive compensation is the toughest job a board of directors has to do.”

The CCGG recently issued a statement saying that during the 2008 proxy voting season, it will not support any regulatory changes or universally back any shareholder resolutions that would introduce mandatory “advisory” shareholder votes on executive compensation packages. (See page 10). An advisory vote is a non-binding vote, and there has been a groundswell of support for this practice in the U.S., in which there have been shareholder resolutions initiated for an advisory vote at more than 60 companies. In Britain and Australia, recently adopted regulations require a non-binding vote on the company’s remuneration report, and in markets such as Netherlands, Sweden, Norway, Spain and France, the vote will become binding in 2008 or 2009. The issue has been nicknamed “Say on Pay” and is expected to be included on the ballots of a number of Canadian companies at this year’s annual meetings.

“Our feeling is: let’s wait and see on this issue,” Beatty says. “Canadian boards are just starting to do a better job on compensation, and it’s hugely difficult to do from the outside.”

The CCGG’s research provides evidence that Canadian boards have made great strides during the past few years to improve their compensation practices and crack down on abuses. New regulations giving a vote to shareholders on executive pay are not the answer now, Beatty says. He believes that pay packages are best decided by corporate boards and their independent executive compensation committees, in co-operation with professional compensation consulting firms. Beatty is encouraged by voluntary changes in recent years in the manner in which corporate directors are elected, and says the move to “majority voting” ensures that shareholders have a stronger say about who is representing their interests on the corporate board.

@page_break@The traditional practice in the U.S. and Canada is for directors to be elected by “plurality” voting, which means one vote could be enough to elect a director and withheld votes aren’t counted. With majority voting, if more votes are withheld than voted, the director’s name would be withdrawn from the running. Beatty says more than 80 companies in Canada have implemented majority voting on a voluntary basis, without waiting for new securities laws to enforce the practice.

“The majority voting philosophy links shareholders to the board,” he says. “Plurality voting is not really voting, although it has been practiced in the U.S. and Canada forever. It means your mother could be the only one to vote, and you’d get on the board.”

Compensation disclosure improved significantly in 2007, the second year it was measured by the Clarkson Centre for Business Ethics and Board Effectiveness. In addition, by 2009, new guidelines established by the Canadian Securities Administrators will require better disclosure of executive compensation and how it’s determined. These will have a significant impact on linking executive pay to performance, Beatty says.

Canadian companies still need to improve when it comes to disclosure of executive pay packages, he says, so that shareholders can understand how compensation decisions are made. The CCGG proposes that companies provide a bottom-line number on CEO pay that summarizes the total value of salary and benefits, taking into account the value of options granted and exercised as well as cash compensation. It also recommends abandoning options that vest over time without requiring the meeting of any performance standards. It should be clearly explained how compensation is tied to performance.

Beatty says that in measuring board performance the CCGG looks at 130 parameters. There are a lot of grey areas in which some companies need help, such as defining what constitutes independence when assembling a compensation committee. Relationships with management increase the risk that a director would put the interests of executives before those of shareholders, he says. The CCGG considers a director to be related to management if he or she has been an employee of the company or any sister or subsidiary company within the past three years, or if their firm has provided legal, auditing or consulting services to the firm within the past three years. Kinship to the CEO or other senior executives also compromises independence. IE