By Stephen Erlichman – Executive Director, Canadian Coalition for Good Governance
The Canadian Coalition for Good Governance (CCGG) is a non-profit corporation whose members are institutional investors that together manage more than C$3trillion in assets.
CCGG promotes good governance practices in Canadian public companies and the improvement of the regulatory environment to best align the interests of boards and management with those of their shareholders and to promote the efficiency and effectiveness of the Canadian capital markets. CCGG, which celebrates its fifteenth anniversary this year, accomplishes its mission by creating policies, by responding to requests for comment from regulators and governments, by making various submissions to have laws enacted or changed and by carrying out a board engagement programme on behalf of members, which is the focus of this article.
Helping boards to communicate better
In 2009, CCGG began a programme of engaging directly with the independent directors of Canadian public companies on governance matters of interest to our members. Currently, CCGG meets annually with independent directors of
45 to 50 issuers that represent a range of industries and market capitalisations. These meetings provide a private forum for dialogue and an exchange of views between independent directors and institutional investors. They also provide an efficient means for boards to communicate with many of their largest shareholders.
In the 2016 engagement season, CCGG held meetings with the independent directors of issuers that collectively represented more that 21 per cent of the total market capitalisation of the S&P/TSX Composite Index. Over the past six years, CCGG has held one or more meetings with the independent directors of 152 of the 250 companies that comprised the S&P/TSX Composite Index as at December 2016. That group represents more than 60 per cent by number and close to 85 per cent by market capitalisation of the index and includes companies from all 11 industry sectors.
The scope of CCGG’s dialogue with independent directors has expanded from an initial focus on governance policies and executive compensation practices to a broader discussion of board composition and the board’s approach to providing effective oversight and input in critical areas such as risk management, strategy setting and board and management succession.
A study of CCGG was carried out by four university professors resulting in a publication in 2015 that made the following conclusion about CCGG’s board engagement programme: “CCGG engagements had a statistically significant and economically meaningful impact on the likelihood of subsequent adoption of majority voting, say-on-pay, on compensation disclosure and structure and on incentives… Through board interlocks, we find the CCGG’s influence extends beyond the engaged firms.
“Our evidence suggests that a collective action organisation can have an impact on governance through activism. The CCGG’s structure facilitated activism by all types of domestic institutional investors, including those that are traditionally expected to be more passive. The factors that contributed to CCGG’s effectiveness may have relevance elsewhere. These include forming a powerful group with a small number of members by focussing on investor scale rather than type and harnessing social incentives, in addition to economic incentives, to improve group functioning and firms’ responses.”
How it works
How does CCGG carry out its board engagement programme? In deciding with which companies to engage in a particular year, CCGG looks at various factors, including our members’ percentage ownership of a company (generally our members own between 15 to 30 per cent of the shares of engaged companies), the industries that we wish to focus on and the market capitalisation of the companies. Whether a company has ‘bad’ or ‘good’ governance is not a primary consideration; CCGG engages with many companies that have good governance because we believe that we can learn from those companies and even well-governed companies still can still improve.
“Governance gavels are awarded to issuers that best meet the guidelines set out in CCGG’s various governance policies, develop exceptional disclosure practices and actively engage with shareholders”
CCGG advises its members in advance of upcoming engagements and invites their input on potential discussion topics. We review the company’s public disclosure materials and prepare a summary that primarily considers the company’s governance practices relative to guidance provided in two of CCGG’s major publications, namely Building High Performance Boards and Executive Compensation Principles. CCGG’s analyst, as well as the CCGG staff member and the CCGG board member who will be attending the engagement, then discuss the summary and finalise the agenda for the meeting. In advance of the engagement meeting, the independent directors are provided with an outline of the intended topics for discussion and are invited to raise additional matters of relevance to their board. The CCGG attendees read the company’s proxy circular and other relevant public documents to prepare for the meeting. The meeting is held with the chair of the board (or if the chair is not independent, then with the lead independent director) as well as the chair of the compensation committee and/or the governance committee. All other independent directors of the company are invited to attend if they wish. CCGG does not ask questions that elicit material, non-public information.
During an engagement, CCGG will urge the independent directors to improve proxy circular disclosure in certain areas and to make substantive changes to improve aspects of their governance. CCGG meets with independent directors only, without company management present, because our institutional shareholder members elect directors (not management) and because our questions often deal with management issues, such as CEO compensation and succession planning.
Following the meeting, CCGG will prepare a confidential summary of what transpired, send the summary to the independent directors for their review and comments, finalise the summary after receiving those comments and then post the final summary on CCGG’s website for members only to assist members in carrying out their stewardship obligations. A copy of the final summary is also provided to the independent directors. If the engagement meeting was the first one with a company, CCGG generally will ask for a meeting the subsequent year in order to see whether the changes CCGG suggested were accepted. To the extent changes were not accepted, CCGG will ask why and, if we disagree, we again explain why we believe the changes should be made. We also will ask new questions based on the company’s latest public disclosure.
Based on the numerous proxy circulars that CCGG reviews every year in connection with the board engagement programme, CCGG prepares an annual publication entitled Best Practices For Proxy Circular Disclosure to assist boards in preparing a proxy circular.
Closely tied to CCGG’s board engagement programme is our ‘governance gavel’ awards, whereby CCGG annually recognises excellence in corporate governance and disclosure. Governance gavels are awarded to issuers that best meet the guidelines set out in CCGG’s various governance policies, develop exceptional disclosure practices and actively engage with shareholders. On an ad hoc basis, CCGG also may recognise issuers that make significant year-over-year improvements in governance and disclosure practices as well as best practices in shareholder engagement.
CCGG recently published its updated stewardship principles. In these principles, CCGG states that institutional investors should engage with portfolio companies, either directly, or by collaborating with other institutional investors or by joining investor associations, such as CCGG. Thus, CCGG’s board engagement programme is a way in which Canadian institutional investors can fulfill one aspect of their stewardship obligations.
Companies now sometimes ask CCGG to have an engagement, thus turning full circle from the initial hesitance that independent directors had when CCGG first commenced its board engagement programme.
About the Author:
Steve Erlichman has practised corporate and securities law throughout his career at major law firms in New York and Toronto and since 1999 has been a senior partner at Fasken Martineau, an international law firm with over 750 lawyers in offices across Canada and in the UK, France and South Africa. In 2011 Steve also became the Executive Director of the Canadian Coalition for Good Governance (CCGG), whose members include most of the largest institutional investors in Canada which collectively manage approximately $3 trillion of assets.
As Executive Director of CCGG, Steve develops CCGG’s agenda and strategy, is in charge of board and member relationships and is CCGG’s public spokesperson. Steve has spoken and written widely and has been interviewed by television, radio and newspaper reporters on numerous topics. The press have called Steve’s writing “insightful” and “prescient” and have referred to Steve as “a leading governance expert” and one of “Canada’s top M&A attorneys”. Steve is a member of the New York and Ontario bars and has law degrees from University of Toronto and New York University as well as an M.B.A. from Harvard University.
1Can Institutional Investors Improve Corporate Governance Through Collective Action?, Professors C. Doidge, A. Dyck, H. Mahmudi and A. Virani, April 2015