Canada’s securities regulators have proposed a set of rules concerning the disclosure of executive compensation designed to prevent the kind of short-term thinking that helped create the global financial crisis.
The list of proposed rules, released in mid-November by the Canadian Securities Administrators, will be out for comment until Feb. 17, 2011. Among the proposed changes is a requirement that boards of directors disclose whether the board has considered the implications of the risks associated with their compensation policies.
According to the CSA, the rule is designed to root out short-term-biased compensation policies that were at the root of the volatility in 2008. The short-term-biased compensation strategies of that era led bankers to take alarmingly large risks that eventually toppled some of the banks around the world.
Forcing boards to disclose whether they have considered the risks to long-term shareholders created by compensation policies is a rule designed to combat that behaviour and reinforce the long-term stability of a company.
Many of the other rules are similarly shareholder friendly. Also up for comment is a requirement to broaden disclosure around the purchase of financial instruments by executives to hedge the risk of stock-based compensation.
Investor advocates in the U.S. have long complained that this type of hedging allows CEOs to reduce their exposure to their own companies’ performance — without appearing to have done so. The new rules would force executives to disclose when they have hedged, thus answering the complaints of shareholders.
And so it is with the rest of the rules: shareholders are getting all kinds of gifts. For instance, also on the list is a proposed requirement that fees paid to compensation consultants be disclosed. As a result, investors will understand whether a possible conflict exists between consultants who offer human resources, or actuarial or benefit services as well as advice on compensation strategies.
If adopted, the proposed rule would see consultants required to report and break out fees in the same way that auditors do now.
The new rules would also require boards to reconcile to “accounting fair value” all share-based and stock options-based awards so that there is no confusion about the price at which options are being granted.
“Our view is that this is important information for shareholders,” says Leslie Byberg, director, investment funds, Ontario Securities Commission.
“The added requirements will improve the overall level of transparency,” adds Peter Roth, a securities lawyer with Farris, Vaughan, Wills & Murphy LLP in Vancouver. “Absolutely … this is a boon for shareholder activists.”@page_break@As a result of these rules, much progress has been made on disclosure of executive compensation over the past couple of years, Roth notes.
“There is a drastic difference between what we have now, compared to what we had five or six years ago,” Roth says.
It was in 2008, under pressure from angry shareholders, that Canadian securities regulators looked to adopt new requirements around disclosure of executive compensation.
At that time, a new regulatory regime was adopted. It required companies to file something called the “compensation discussion and analysis,” or CD&A — a new more detailed discussion about compensation — as well as a number for “total compensation.”
To chart the implementation of the new requirements, the CSA followed up with a study to assess the implementation of the rules in the spring of 2009.
That study found that 62 of 70 companies were reporting adequately, while eight companies were ordered to refile.
The November proposals are partly a response to that review, Byberg says. (Securities administrators will be tightening up a provision in those rules that allows some things to remain undisclosed for competitive reasons.)
The new rules are also an attempt to keep pace with the U.S. — a country in which the environment around disclosure is shifting rapidly. “We found there were some areas that could be more clearly defined,” says Byberg. “But we also saw this as an opportunity to address some of the changes in the U.S.”
The Dodd-Frank Act, a sprawling financial services reform bill, has been called the most sweeping change to financial regulation in the U.S. since the Great Depression.
The bill is massive and affects just about every area of the financial services industry, from insurance, to mortgages, to credit-rating agencies, to derivatives.
The bill consolidates regulatory agencies, creates new ones to oversee retail financial services as well as general economic stability, and will usher in a whole new set of consumer protections.
The CSA’s new rules are designed to keep Canada’s regulations in line with the basic rules that our largest trading partner is now adopting.
This is positive, says Roth, but he is careful to note that there are some differences in the way the regulations are being implemented north and south of the border.
For instance, under the Dodd-Frank Act, say-on-pay — in which investors are given a voice on executive compensation — is binding. That’s not the case in Canada.
“Say-on-pay votes are non-binding here, and that’s key,” says Roth. “I think this is something that’s important to note in all of this. There are some differences. We’re not going as far as the U.S. is with Dodd-Frank.” IE
CSA targets executive compensation
Proposed rules on executive compensation would bring Canada more in line with new laws in the U.S.
- By: Jeff Sanford
- December 6, 2010 May 31, 2019
- 12:18