Trends in Corporate Governance Best Practices 2016 · The Fairmont Chateau Whistler| Whistler, BC| August 21-24, 2016 54% 48% 44% 41% 26% 15% 15% 11% 11% 6% 2% 11% Operational risk

Trends in Corporate Governance Best Practices 2016

Christopher A. Chen Mathé Grenier

August 22, 2016

The Canadian Society of Corporate Secretaries

18th Annual Corporate Governance ConferenceThe Fairmont Chateau Whistler| Whistler, BC| August 21-24, 2016

What we will cover in 60 minutes

Three areas of focus



The approach we took:

The 2016 CSCS –Hay Group Corporate Governance Practices Survey

What we found:

Reflecting the key trends of corporate governance in Canada

Insights into one of the top board matters:

CEO Succession Planning

01 02 03

2

About Korn Ferry Hay Group



3

1. 2016 Survey Approach



4

Survey methodology

– What is it?

• CSCS and Hay Group 4th annual Corporate Governance practices survey



Online surveyConducted with over 100 companies across Canada

Detailed qualitative survey With Corporate Secretaries of each nominated organization

CSCS Excellence in Governance awardsResults used during the nomination process

5

Focus of our research

– Corporate sustainability governance

– Pay for performance and design

– Enterprise risk management oversight and governance

– Engagement by a governance team

– Boardroom diversity

– Effective Board and committee operations



6

Participant background



5%

19%

24%

1%

4%6%

42%

Respondents by industry

Consumer

Financial

Industrial

Life Science

Technology

Professional Services

Broader PublicServices

27% from not-for-profit 53% up to 500 employees

Industries with the most responses are the broader public sector (42%) and industrial sector (24%).

7

2. Corporate Governance Overview



8

What are your most significant corporate governance issues?



16%

4%

4%

5%

5%

6%

6%

10%

10%

13%

13%

14%

15%

16%

19%

22%

27%

47%

Other

Development of conflict management culture

No issue

Financial reporting

Subsidiary governance

CEO performance/evaluation

Crisis readiness

Amount of disclosure

Independent Board leadership

Executive compensation

Shareholder interaction

Executive bench strength and succession

CEO succession planning

Corporate sustainability

Cyber risk

Board diversity

Dynamic regulation compliance

Risk management and oversight

Most significant corporate governance issue

9

What are the most critical types of risks facing your organization today?



54%

48%

44%

41%

26%

15%

15%

11%

11%

6%

2%

11%

Operational risk

Financial risk

Cyber / Technological / IT risk

Reputational risk

Strategy risk

Compliance-related risk

People risk

Governance risk

Environmental risk

Compensation risk

Financial reporting risk

Other

Most critical types of risks

10

What are the top issues for your Board?



4%

5%

5%

7%

9%

14%

18%

37%

Crisis management / planning

Executive compensation

Developing human capital

Information technology issues

Regulatory compliance

Succession planning

Risk management

Strategic planning

Top three board matters (1 being most important)

Ranked 1

Ranked 2

Ranked 3

67%

59%

53%

33%

26%

25%

18%

16%

11

What is your opinion on the impact of corporate governance codes and legislation?



0%

10%

20%

30%

40%

50%

60%

2013 2014 2015 2016

Impact of corporate governance codes and legislation

Positive Neutral Negative/ Room for improvement

12

3. Trends in

Corporate Sustainability Governance



13

What we explored



1 2 3

Corporate sustainability governance

Sustainability initiatives Performance related to sustainability

14

Corporate sustainability governance



33%

18%12%

37%

Formal sustainability policy

Yes, fully implemented

Yes, beingimplemented

No, but underconsideration

No

10%

51%

5%

34%

Frequency of sustainability policy review

At least every sixmonths

Annually

Once every two years

As needed

Never (0%)

What we found:One half of respondents have a formal sustainability policy in place. One half review the policy annually.

15

Sustainability initiatives



13%

37%

47%

57%

60%

60%

70%

Other

Green standards

Cutting emissions or pollutants

Enhancing impact on local communities

Improving environment around facilities

Going paperless in the workplace

Improving energy efficiency

Sustainability initiatives

What we found: The majority of organizations have at least one sustainability initiative in place. Publicly traded organizations have implemented the largest number of initiatives per organization.

16

Performance related to sustainability



What we found:For over one third of

organizations, the Board

assesses management's

performance on

sustainability initiatives

on an annual basis.

23%

38%

28%

11%

Management sustainability evaluation

At least every six months

Annually

Once every two years (0%)

As needed

Never

17

4. Trends in Pay for Performance Governance

and Design



18

What we explored



1 2 3

Executive pay plan Pay for performance analysis

Performance incentives

19

Executive pay plan



*30% of participating organizations who responded to these questions are publicly traded.

What we found:The same factors have the most impact over the Board’s decision on actual executive compensation, such as payout / grant as the impact on the final design of the program.

20

Pay for performance analysis



25%

45%

47%

Yes, compared to an external

peer group

No

Yes, compared to a

performance metric or metrics

(e.g. TSR, Earnings Growth)

Pay for performance analysisWhat we found:Almost one of every two organizations conduct an after-the-fact pay for performance analysis for their CEOs/NEOs compared to a performance metric(s).

21

Performance incentives



14%

5%5%6%

12%

3%3%9%

30%30%

24%

13%

26%

58%

71%

94%

Customer feedbackOperational goalsIndividual contributionFinancial goals

Short term incentive performance measures

No Impact

Little Impact

Some Impact

Large Impact

What we found:Since 2013, financial goals has remained the measure with the largest impact on performance incentive measurement. 22

5. Trends in Enterprise Risk Management Oversight and

Governance



23

What we explored



1 2 3

Formal risk policy Barriers to risk oversight process

Disclosure

4 5 6

Ethics and risk Compensation-related risk

Compensation clawback policy

24



Risk management and oversight

is by far the most significant

issue companies face.

25

Formal risk policy



72%

11%14%

4%

47%

14%17%

22%

47%

15%17%

20%

49%

15% 15%

21%

Yes, fully implemented Yes, being implemented No, but underconsideration

No

Presence of Formal Risk Policy

2016

2015

2014

2013

What we found: Since 2013, the proportion of boards with policies on risk is increasing. Financial and publicly traded organizations have the largest percentage of respondents with a fully implemented formal risk policy.

26

Barriers to risk oversight process



37%

35%

33%

19%

14%

12%

5%

37%

Gap in risk reporting

Lack of understanding of risks by Board

Lack of clarity and agreement about risk philosophy

Risk management is not perceived as a priority

Lack of understanding of risks by management

Misalignment of risk appetite framework

Organization culture is not supportive

Other

Barriers to risk oversight process

27

Disclosure



32%

59%

7%

2%

Risk disclosure material

Yes, in great detail

Yes, in high level only


No and not planning todisclose

What we found:Nine in ten organizations discuss risk oversight and risk management in disclosure material. This number is even greater in publicly traded organizations (94%).

28

Ethics and risk



77%

16%

2%

5%

Business conduct and ethics policy

Yes, all employees must signan agreement

Yes, but no formal signedagreement by employees

No, but under consideration

No

What we found:93% of organizations have an employee business conduct and ethics policy in place. Of these organizations, 77% require all employees to sign an agreement.

29

Compensation-related risk



35%

16%

49%

Deferred compensation/LTI for executives

Yes, only one program forall executives inheadquarters

Yes, multiple programs forall executives inheadquarters

No long term incentiveprogram

What we found:Half of organizations use a deferred compensation or long term incentive (LTI) program for executives. All publicly traded organizations use a deferred compensation or long term incentive (LTI) program for executives.

30

Compensation clawback policy



94%

88%

81%

50%

25%

CEO

CFO

Other NEOs (e.g. SVP)

VPs

Other employees who have material risk impacts

Employees covered by clawback

What we found:The trend shows that the further the employees are from the CEO in the chain of command, the less likely they are to be covered by the clawback policy. 31

6. Trends in Engagement by aGovernance Team



32

What we explored



1 2 3

Frequency of Board interaction

Stakeholder groups Relationship between the IRO and Board

33

Frequency of Board interaction



47%

28%

25%

Board interaction with shareholders

Our Board schedules astructured meeting or callwith shareholders at leastonce per year

Board members will meetwith shareholders only ifasked

The Board does not interactdirectly with shareholdersand relies on executives todo so

What we found:Almost half of participating organizations schedule a structured meeting or call with shareholders at least once per year.

34

Stakeholder groups



38%

20%

29%

38%

38%

66%

70%

Other

Retail shareholders

Proxy advisory firms

Institutional investors

Analysts

Regulators

Media

Interaction with stakeholder groups

What we found: Respondents tend to interact most frequently with the media and regulators, a trend that has remained consistent over the past four years.

35

Relationship between the IRO and Board



18%23%

79%

71%

4% 5%

Investor Relations Officer (IRO) role ismore important due to changing rules

and regulations

The Board understands the role andresponsibilities of the IRO and seeks

advice

Relationship between the IRO and Board

Completely Agree

Neutral

Completely Disagree

36

7. Trends in Boardroom Diversity



37

What we explored



1 2 3

Board diversity policy Gender, visible minority and ethnic diversity

Board recruitment policy

38

Board diversity policy



43%

4%

26%28%

23%

12%

24%

42%

14%

7%

38%40%

15%

9%

23%

53%

Yes, fully implemented Yes, being implemented No, but underconsideration

No

Formal Board diversity policy

2016

2015

2014

2013

What we found: Since 2013, the proportion of boards with policies on boardroom diversity is increasing.

39

Gender, visible minority and ethnic diversity



Facts & Figures within the Canadian Boardroom

5 Average number of Committees

100% Boards with female representation

57%Boards with visible minority

representation

36% Boards including non-Canadians

43 years Average age of the youngest director

57 years Average age of Board directors

70 years Average age of the oldest director

5+

yearsTypical tenure

Gender diversity:19% of organizations have 1 female, and 81% have 2+ females.

Visible minority diversity:2016 is the first year in which the majority of organizations have had a member of a visible minority on the Board.

Ethnic diversity:Of the Boards who have a non-Canadian director, the number ranges from 1 to 6.

40




70%

15%

15%



Yes, being implemented(0%)


No

What we found:70% of organizations have a fully implemented formal Board recruitment policy in place, covering practices surrounding Director nomination and election. This number has increased by 18% since 2015.

41

8. Trends in Effective Board and Committee Operations



42

What we explored



1 2 3

Board committees Board meetings Board performance evaluation

4 5 6

Management performance evaluation

Director orientation and education


43

Board committees



91%

89%

83%

72%

70%

56%

35%

30%

30%

26%

9%

37%

Governance

Audit

Compensation / Human Resources

Nomination

Finance

Risk

Investment

Social Responsibility/ Sustainability

Pension

Safety / Health / Reliability

Reserve

Other

What we found:Governance, audit and compensation/human resources remain the top three

Board sub-committees from 2015 to 2016. 44

Board meetings



39%

50%

11%

3%

48%

33%

16%

2%

49%

30%

19%

4%

40%

36%

20%

0-2 times

3-6 times

7-10 times

>10 times

2013

2014

2015

2016

What we found:Over the last four years, the frequency of Board meetings in the last full fiscal year has significantly increased for 7-10 meetings per year.

45

Board performance evaluation



75%

65% 67%

80%

25%

35% 33%

20%

2013 2014 2015 2016

Formal Board performance evaluation policy

Yes No

What we found:80% of organizations have a formal policy for Board performance evaluation

that includes written objectives, processes and reports. This has significantly

increased since 2015, where 67% of organizations had a formal policy for

Board performance evaluation. 46

Management performance evaluation



2%

9%

19%

34%

50%

69%

No performance evaluation process in place

Based purely on financial measures tied to last year’s performance

Largely discretionary by the Board

Includes a formal 360 degree leadership assessment

Includes development objectives to support the CEO improvehis/her performance

Uses a balanced scorecard approach (financial, operational,people, customer)

Senior management performance evaluation

47

Director orientation and education



80%

78%

67%

55%

45%

43%

35%

29%

18%

14%

10%

25%

Industry specific topics

Risk oversight

Organization policies

Regulatory issues

Compensation

Ethics

Financial and liquidity risk

Market risk

Anti-corruption policies

Insider trading

Political contributions

Other

Board education topics

48

12%

22%

17%

50%

23%

20%

17%

40%

31%

20%

11%

37%

30%

15%

15%

39%

No


Yes, being implemented


CEO succession planning policy

2013 2014 2015 2016




7%

33%

47%

53%

53%

56%

58%

Regular scan of external CEO talent inmarket

Formal assessment of CEO successioncandidates

Forward-looking CEO role profile

Systematic process to identify internaltalent bench

Leadership development program

Systematic process to identifysuccession talent

Emergency replacement plan for theCEO

CEO succession planning process

What we found:50% of organizations have implemented a formal CEO succession planning

process. Since 2013, there has been a significant upward trend in

implementing a formal CEO succession planning process, most commonly

being an emergency replacement plan for the CEO. 49

Why CEO Succession Planning is Critical to Today’s Boards



• It is the most important accountability of the Board

• It cannot be “outsourced”

• SEC, FDIC, investors, analysts are watching more closely

The Accountability is Clear

• CEO Succession “in the news,” with a negative spotlight

• High-profile CEO failures are on the rise

• Regulations are increasing

The Pressure’s On

• Generates an expanded pipeline of internal and external talent

• Positions the company for sustained growth

• Benchmarks executives against the competition

• Attracts and retains high-potential talent

CEO Succession Creates Long-Term

Value

50

What are the Roadblocks to Effective CEO Succession Planning?



• Desire to avoid a “horse race”

• Board member discomfort with

proactively addressing the topic

with the incumbent CEO

• CEOs unwilling to confront their

mortality

• No clear link between business

strategy and requirements for next

generations of CEOs

• No standard method for evaluating

internal and external candidates

• Bias for either internal promotion

or external search

Lack of Process Rigor

Human Nature

Lack Of Alignment

• Lack of board agreement on

strategic priorities for today and for

the future

• Lack of clarity on how these

priorities translate to the CEO profile

• Insufficient agreement on the

readiness of internal candidates

51

The “Gold Standard” in CEO Succession:Six Defining Tenets



1Align the Board on future CEO profiles that are driven by business strategy

2Assess candidates against industry benchmarks, valid indicators of executive potential, and the CEO profiles you’ve developed

3 Think 2-3 CEO moves ahead; don’t just seek to replace the incumbent

4“Cross train” generations of CEO successors with a mix of on-the-job training, intensive coaching, mentoring, and education

5Become more intimately familiar with the bench and their potential. There are generations of CEOs in your company

6Keep CEO succession as a standing Board agenda item since it ensures a multi-layered, multi-generational process

52

The Korn Ferry Readiness Assessment ImpactIdentify a Successor with Staying Power



53

LONGITUDINAL STUDY: Researchers analyzed candidates who completed the Korn Ferry Readiness Assessment and then tracked these individuals and the financial performance of their organizations after being placed into the CEO role.

0

1

2

3

4

5

6

7

High

Performers

Low

Performers

F500 CEOs

6.1

*Blazek (2015)

CEOs identified as High Performers had tenures 67% longer than Low Performers, an average of 2 years and 5 months*.

STRATEGIC VISION

TENURE

Four CEO competencies most strongly predict tenure:

CEO TENURE IN YEARS(average)

3.6 4.6

ALIGNS EXECUTION

COLLABORATES

ENGAGES AND INSPIRES

The Korn Ferry Readiness Assessment ImpactEnhance Company Financial Performance



54

CEO tenure also correlates with increases in revenue, market cap, and stock price.

STRATEGIC VISION

Financial Performance

Four CEO competencies most strongly predict superior financial performance of an organization:

Key Financial MetricsOrganizations with CEOs identified as High Performers outperform a peer group of competitors, as well as Low Performers.

ALIGNS EXECUTION

FINANCIAL ACUMEN

MANAGES COMPLEXITY

PERCENT INCREASE

CEOCOMPARISON

MARKET CAP

STOCK PRICE

REVENUE EPS OVERALL

HighPerformers

vs. Low

Performers

✔102%

vs. 22%

✔89% vs.

26%

✔25% vs.

17%

✔50% vs.

45%

✔

HighPerformers

vs.Competitors

✔102%

vs. 68%

✔89%vs.

49%

✔50% vs.

26%

✔

✔ = statistically significant ✔ = trending in the right direction

N=161Timeframe: 2005-2015

*Blazek, Jones, & Lewis (2016, draft)

Questions?



55

Who to contact



Mathé GrenierMathé Grenier is a Senior Client Partner based in Vancouver, BC, supportingclients across Western Canada. With a focus on Board of Directors andexecutive level solutions, Mathé specializes in leadership and organizationaltransformation, succession planning, leadership development, boardeffectiveness, executive coaching and strategy facilitation. She works to createalignment, resilience and motivation at all levels to facilitate strategy execution.

Email: [email protected]: +1 778 945 2917

Christopher A. ChenChristopher is a Senior Client Partner and Canadian Practice Leader forExecutive Pay & Governance , based in Toronto ON, and sits on Hay Group’sExecutive Reward Global Leadership Team and the Canadian ManagementCommittee. He advises clients on supporting stakeholder value througheffectively aligning organizational strategy to executive compensation.

Email: [email protected]: +1 416 815 6385

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Documents

Trends in Corporate Governance Best Practices 2016 · The Fairmont Chateau Whistler| Whistler, BC| August 21-24, 2016 54% 48% 44% 41% 26% 15% 15% 11% 11% 6% 2% 11% Operational risk