October 27, 2006

Executive Compensation Disclosure: Canadian Regulators Cooking Up New Rules Too

From ISS’ “Corporate Governance” Blog: “The Globe and Mail had an interesting article the other day by Janet McFarland and Elizabeth Church titled “New Disclosure Rules to Reflect Evolving World.” The article states that Canadian investors will soon have the opportunity to learn more about executive pay packages as regulators prepare to revise compensation disclosure rules introduced more than a decade ago.

The Canadian Securities Administrators (CSA) expects to have a new set of rules ready early next year, requiring full disclosure of virtually every detail of executive compensation.”

Rising CEO Pay

Yesterday, the NY Times ran this article about the highest paid CEO for this year, based on data from a recent report from The Corporate Library. In this podcast, Paul Hodgson of The Corporate Library discusses this recent 18-page special report on CEO pay trends, including:

– Why does your survey come out so late compared to others?
– What was the driving force behind the large increase in CEO pay?
– What happened this year with restricted stock grants to CEOs?
– Are stock options going to play as large a role in the future as they have in the past?
– Why is the increase in CEO pay so much lower for small cap companies compared to larger companies?

CEOs as Independent Directors

From In 1990, out of the largest 500 American companies, 358 active CEOs served on outside boards filling 794 seats. As of June 2006, only 265 served on an outside board filling 376 seats, a 53% decline. CEOs who continue to serve have reduced their seats by 36%. Service on outside boards for CEOs of the largest 100 companies went from almost 90% to less than 60%.

Jim Drury, founder and CEO of search firm JamesDruryPartners, argues companies need to make outside board service a priority for their own CEOs. “CEOs learn a lot when serving on boards other than their own. After all, many companies deal with the same issues: international expansion, global sourcing, product innovation, technology enhancement. When a CEO gains an inside look at how other companies handle these crucial problems, she can be a more effective leader in her own firm. And CEOs can work more effectively with their own boards if they’ve experienced life on the other side of the table.” “With CEOs abandoning the boardroom, it’s time for reformers to remember that ‘too much of a good thing is never a good thing.’” (Boardroom Brain Drain,, 10/16/06)

Directorship views the picture from a somewhat different perspective. “The good news is that once a nominating committee is willing to look beyond the traditional specifications, the pool of talented potential directors widens considerably.” One obvious source of supply is the cohort of recently retired CEOs; another is active CFOs and the retired managing partners of the big accounting firms. Women and minorities are viewed as a third source. “The emphasis on skill sets is steering some nominating committees toward candidates with particular expertise rather than particular titles.” “With boards under pressure to represent shareholders’ interests more visibly, some observers think the universe of investor relations professionals could be a future source of potential directors.” “A seat on the board of a public corporation is increasingly seen as necessary training for up-andcoming executives.” (Who Will Sit on Tomorrow’s Boards?, Directorship, 10/06)

Shaping Strategy from the Boardroom, argues that CEOs should have more influence over who sits on the board, not less. Nominating committees have been given too much control over board composition. CEOs should have more say in picking directors who know the business. But boards should be more involved in driving corporate strategy. Boards must also make strategy as important as compliance when they manage their work and reform their processes. Industry expertise may be more important than previous board experience. (The McKinsey Quarterly, 10/18/06)

Many reformers would be happy to have CEOs of their companies sit on another board to get such cross-fertilization of ideas, if the CEO of their board is nominated by shareholders of the other company. Board loyalties tend to be to those who brought them to the dance (to paraphrase Nell Minow). Its about time that at least some of the invitations go out from the owners.