2014 Best Practices. for Proxy Circular Disclosure. PO Box 22, Queen St W, Toronto, ON M5H 3R3

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1 PO Box 22, Queen St W, Toronto, ON M5H 3R3

2 Table of Contents Introduction... 1 Governance Gavel Awards... 2 Recommended Tools for Disclosure... 4 Disclosure of Governance Practices... 5 Disclosure of Executive Compensation Disclosure by Equity Controlled Corporations Disclosure by Dual Class Share Companies CCGG Introduction i

3 Introduction Since 2004, the Canadian Coalition for Good Governance (CCGG) has prepared best practices documents for reporting issuers. These documents, including this 2014 Best Practices publication, provide examples of excellent disclosure by Canadian issuers in the area of corporate governance and executive compensation. Mission of CCGG The Members of the Canadian Coalition for Good Governance are Canadian institutional investors that together manage more than $2 trillion in assets on behalf of pension fund contributors, mutual fund unit holders and other institutional and individual investors. 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. A note on terminology In this document, any use of the term company refers broadly to any reporting issuer and likewise any use of the term share refers to any form of traded equity. Why proxy disclosure matters The proxy circular is the primary means for a company to communicate its corporate governance practices to its shareholders. Shareholders expect the circular to articulate, in plain language, the governance practices and activities of the board, the qualifications of directors, and the issuer s executive compensation programs and risk management strategy, including how the company s compensation plan is linked to the company s strategy and objectives. How to use this document Issuers should be familiar with and model their policies and behaviours based on the guidelines laid out in CCGG s Building High Performance Boards, Executive Compensation Principles and other CCGG publications. This document gives life to our principles and provides inspiration for creating and disclosing good corporate governance practices. Feedback We value your feedback. Please feel free to send us best practices you have come across or other suggestions for improvement. You can reach us at aabid@ccgg.ca or CCGG Introduction 1

4 Governance Gavel Awards Established in 2005, CCGG s Governance Gavel Awards recognize excellence in disclosure by issuers through their annual proxy circular. Awards are given for excellence in disclosure of board governance practices and director qualifications, and excellence in disclosure of an issuer s approach to executive compensation. CCGG also recognizes issuer disclosure in other categories on an ad hoc basis. Issuers whose governance practices meet substantially all of CCGG s Building High Performance Boards and Executive Compensation Principles guidelines and who believe that their disclosure warrants consideration for a Governance Gavel award are invited to contact us. Best Disclosure of Board Governance Practices and Director Qualifications In determining the winner of CCGG s Best Disclosure of Board Governance Practices and Director Qualifications Gavel award, CCGG considers the alignment between an issuer s governance practices and the recommended practices set out in Building High Performance Boards and looks for proxy circular disclosures that allow CCGG to assess that alignment. CCGG also looks for disclosures that include the following information: detailed biographies for each director along with a director skills matrix the board s process for identifying and recruiting directors the board s orientation and continuing education programs for directors the board s performance assessment processes, expectations for directors and the attendance record of each director at board and committee meetings director compensation and share ownership requirements Award Winner: Canadian Pacific Railway Limited Best Disclosure of Approach to Executive Compensation In determining the winner of CCGG s Best Disclosure of Approach to Executive Compensation Gavel award, CCGG looks for executive compensation disclosure to incorporate substantially all of the best practices outlined in Executive Compensation Principles and which specifically addresses key areas including: the links between an issuer s long-term corporate strategy and its executive compensation programs the links between an issuer s risk management programs and executive compensation a clear and detailed description of the components of the executive compensation program and how decisions are made disclosure of employment contracts, severance agreements and limitations on retirement benefits and perquisites. CCGG Governance Gavel Awards 2

5 2014 Award Winner: Pembina Pipeline Corporation Best Disclosure of Governance Practices and Approach to Executive Compensation by a Small or Mid-Sized Issuer CCGG makes a special effort to recognize small or mid-sized issuers that are governance leaders through adoption and disclosure of our recommended practices in corporate governance and executive compensation Award Winner: Vermilion Energy Inc. What do we mean by plain language and what are the benefits of its use? Plain language is a form of communication that allows your intended audience to understand the information you are trying to convey the first time they read or hear it. In order to achieve effective disclosure, CCGG recommends that issuers present information in a manner that: is easy to find is easy to understand is accurate and complete includes context so that the information has meaning. Plain language does not mean that issuers should exclude complex information that shareholders require to make informed investment and proxy voting decisions. Rather, plain language means issuers should disclose all the information shareholders need in a manner that is understandable and user-friendly, regardless of its complexity. As the SEC writes in A Plain English Handbook: Plain English means analyzing and deciding what information investors need to make informed decisions, before words, sentences, or paragraphs are considered. A plain English document uses words economically and at a level the audience can understand. Its sentence structure is tight. Its tone is welcoming and direct. Its design is visually appealing. A plain English document is easy to read and looks like it s meant to be read. CCGG Governance Gavel Awards 3

6 Recommended Tools for Disclosure Companies should use plain language in their disclosure documents, but other tools also must be employed to give the document structure, ensure flow and communicate information meaningfully. Organize for understanding Organize the document in a manner that supports an understanding of the information it contains. Issuers should consider whether their disclosure documents are organized in a logical flow so that information continues to build upon itself, if applicable, and does not jump back and forth between different topics. Use descriptive headings Descriptive headings and subheadings allow readers to quickly find the information they are seeking and break up the document into more manageable pieces. Draw attention to key ideas Some effective disclosures by Canadian issuers provide summary overviews of each major section while others use highlight boxes to draw readers attention to the main ideas. For example, a plain language letter to shareholders near the beginning of the circular summarizing the key ideas that the board wishes to relay to shareholders. Group related information Grouping related information helps readers better understand the overall message being conveyed and reduces redundancies in disclosure documents. Whenever possible, the reader should not be made to jump around to different sections to understand a single component of compensation. Introduce at a high level For disclosure of executive compensation plans, CCGG recommends that the board consider including a plain-language introduction to the CD&A section that provides a high-level overview of the issuer s compensation programs, the board s approach to Some issuers use a highlight box to summarize main ideas or highlight important information. executive compensation decision-making, a discussion of the decisions made during the past year and how these decisions link to the issuer s corporate objectives and risk management programs. Employ visual aids Use charts, tables or images to explain complicated or detailed information wherever appropriate. These visual aids can explain information more fully and easily than text alone and their use helps to divide the document into smaller pieces for easier reading. Avoid industry talk Avoid jargon that confuses the message. When it is necessary or best to use industry words or technical information, define or explain terms clearly. CCGG Recommended Tools for Disclosure 4

7 Disclosure of Governance Practices Proxy circulars should articulate a company s governance practices clearly and in a format that allows the reader to assess them in relation to the guidelines contained in Building High Performance Boards. This section shows examples of excellent disclosure in the following areas: Majority Voting... 5 Voting Results... 6 Director Independence... 7 Director Interlocks... 8 Independence of the Board Chair... 9 Director Nominee Profiles Board Succession and Skills Matrix Director Continuing Education Director Attendance and Committee Composition Director Compensation Director Evaluation Executive Succession Strategic Planning Oversight Risk Management Oversight Shareholder Engagement Majority Voting TELUS Corporation, 2014 Proxy Circular, page 7: [ ]Our majority voting policy applies to this election. Under this policy, a director who is elected in an uncontested election with more votes withheld than voted in favour of his or her election will be required to tender his or her resignation to the Board Chair. The resignation will be effective when accepted by the Board. The Board expects that resignations will be accepted, unless extenuating circumstances warrant a contrary decision. We will announce the Board s decision (including the reason for not accepting any resignation) by news release within 90 days of the Meeting where the election was held. You can download a copy of our majority voting policy at telus.com/governance. TELUS discloses a majority voting policy that is very similar to the CCGG model form and that contains all of the most important elements: directors with more votes withheld than for must submit resignations promptly, the board must accept resignations except in special circumstances, and CCGG Disclosure of Governance Practices 5

8 the board must announce its decision to either accept or reject the resignation in a press release within 90 days, including reasons for not accepting the resignation, if applicable. Voting Results Precision Drilling Corporation, 2014 Report of Voting Results: Voting results should be disclosed immediately after a shareholder meeting. The disclosure should include a detailed breakdown of votes on each motion and each director election. Precision Drilling discloses the number of Votes For and Votes Withheld for each matter listed on the proxy. CCGG Disclosure of Governance Practices 6

9 Director Independence Vermilion Energy Inc., 2014 Proxy Circular, page 28: Vermilion uses a table to identify clearly which directors are independent and which directors are not independent. It also provides additional details for directors that were previously not independent. Canadian Pacific Railway, 2014 Proxy Circular, page 73: Canadian Pacific highlights their adoption of a CCGG-recommended best practice: holding a portion of each board and committee meeting in camera, i.e. with independent directors only. CCGG Disclosure of Governance Practices 7

10 Director Interlocks Canadian Pacific Railway, 2014 Proxy Circular, page 73: Boards should limit the number of interlocks. Canadian Pacific discloses that it avoids interlocking relationships to the extent possible and it also discloses the current number of interlocks (zero). BCE Inc., 2014 Proxy Circular, page 29: BCE discloses both its policy on director interlocks (no more than two Board members may sit on the same public company board) and it also indicates which directors currently sit together on other public company boards. CCGG Disclosure of Governance Practices 8

11 Independence of the Board Chair Vermilion Energy Inc., 2014 Proxy Circular, pages 44: Board Chairman The terms of reference for the Board Chairman address working with management and managing the Board, including meeting processes and the roles and responsibilities of the directors. We have had an independent, non-executive Board Chairman since Keeping our CEO and Board Chairman positions separate allows the Board to more effectively oversee management and enhance accountability. Having an independent Board Chairman fosters strong leadership, robust discussion and effective decisions, while avoiding potential conflicts of interest. The position of Board Chair should be separate from the CEO. Additionally, the Chair should be chosen from among an issuer s independent directors. The Chair s role and responsibilities should be clearly defined. Vermilion discloses its adoption of these recommendations. CCGG Disclosure of Governance Practices 9

12 Director Nominee Profiles Valeant Pharmaceuticals International, 2014 Proxy Circular, page 15: Director nominee profiles provide shareholders with detailed information about their representatives on the board. Valeant does a good job at explaining how each director s qualifications enable them to contribute to the board and to the committees they sit on. CCGG Disclosure of Governance Practices 10

13 Board Succession and Skills Matrix Potash Corporation of Saskatchewan Inc., 2014 Proxy Circular, pages 29-31: Nomination Processes, Succession Planning and Board Renewal A core responsibility of the CG&N Committee is to identify prospective Board members, consistent with Board-approved criteria, and to recommend such individuals to the Board for nomination for election to the Board at each annual meeting of shareholders or to fill vacancies on the Board and address related matters. For the CG&N Committee to recommend an individual for Board membership, candidates are assessed on their individual qualifications, diversity, experience and expertise and must exhibit the highest degree of integrity, professionalism, values and independent judgment. The CG&N Committee and the Board do not adhere to any quotas in determining Board membership, however, the Board s formal Processes for Director Succession and Recruitment expressly encourages the promotion of diversity. As a result, while the emphasis on filling board vacancies is on finding the best qualified candidates given the needs and circumstances of the Board, a nominee s diversity of gender, race, nationality or other attributes may be considered favorably in his or her assessment. The CG&N Committee believes that the Board should be comprised of directors with a broad range of experience and expertise and utilizes a skills matrix to identify those areas which are necessary for the Board to carry out its mandate effectively. The following table reflects the diverse skill set of the Board and identifies the specific experience and expertise brought by each individual director The Chair of the CG&N Committee, in consultation with the CG&N Committee, the Board Chair and the CEO, maintain an evergreen list of potential candidates and their biographical information In accordance with section 137 of the Canada Business Corporations Act (the CBCA ), shareholders holding in the aggregate not less than 5% of the Corporation s outstanding Shares may submit a formal proposal for individuals to be nominated for election as directors. Shareholders wishing to make such a formal proposal should refer to the relevant provisions of the CBCA for a description of the procedures to be followed. For additional information regarding shareholder proposal, see 2015 Shareholder Proposals on page 77. Shareholders who do not meet the threshold criteria for making or otherwise choose not to make a formal proposal may at any time suggest nominees for election to the Board. Names of and supporting information regarding such nominees should be submitted to: Corporate Secretary, Potash Corporation of Saskatchewan Inc., Suite 500, 122 1st Avenue South, Saskatoon, Saskatchewan, Canada, S7K 7G3. CCGG Disclosure of Governance Practices 11

14 Boards should have a plan in place for orderly succession of directors and should maintain an evergreen list of candidates. Boards also should identify key skills required of directors and use a skills matrix to ensure these skills are accounted for among current and prospective directors. The skills matrix for current directors should be disclosed in the proxy circular. In addition to adopting all of the above best practices, PotashCorp also provides its shareholders who own less than 5% of the outstanding shares with an opportunity to suggest nominees for election to the Board, which CCGG believes is a practice other companies should emulate. CCGG Disclosure of Governance Practices 12

15 TELUS Corporation, 2014 Proxy Circular, pages 27-28: Size and composition of the Board and nomination of directors The Corporate Governance Committee regularly reviews the current profile of the Board, including the average age and tenure of individual directors and the representation of various areas of expertise, experience and diversity. The objective is to have a sufficient range of skills, expertise and experience to ensure that the Board can carry out its responsibilities effectively. However, the Board strives to achieve a balance between the need to have a depth of institutional experience and knowledge from its members and the need for renewal and new perspectives The Board does not have a mandatory age limit, but in 2013, it adopted a 15-year term limit policy The term limit policy will not replace the rigorous annual performance assessment process that takes place under the leadership of the Corporate Governance Committee. In conjunction with the Board evaluation and as part of the succession planning process, directors are also canvassed on their intention to retire from the Board in order to identify impending vacancies as far in advance as possible. The succession planning process also involves the creation of a skills matrix, which helps the Corporate Governance Committee and the Board identify any gaps in the skills and competencies considered most relevant for the Company The table below lists the top three competencies of our nominees together with their age range, tenure, official languages spoken and residency. TELUS Corporation provides investors with a table that highlights some of the key attributes that are tracked for each board member by the Corporate Governance Committee. It also states that while term limits are in place they are not meant to replace the rigorous annual director assessment process. CCGG Disclosure of Governance Practices 13

16 Director Continuing Education ShawCor Ltd., 2014 Proxy Circular, page 19: Continuing Education The Company undertakes ongoing education efforts that include on-site visits to various facilities. Both outside advisors and senior managers of the Company s corporate office and its various divisions make regular presentations to the Board and its Committees regarding business and legal matters. During 2013, the topics of these presentations included the onshore and off shore oil and gas markets, new product/process development, internal controls over financial reporting, the Company s disclosure controls and procedures, foreign currency exposure and cash management, insurance, pensions, internal audit, taxation, agency relationships, strategic planning, corporate finance, industry mergers and acquisitions, risk management, corporate governance, shareholder relations, director recruitment, executive and director compensation and succession planning, employee talent review and management, and health, safety and environmental matters The Company has also developed a library containing industry related videos, films, programs, etc., which it has provided to all directors and which it updates periodically. Prior to 2013, the Company paid for one director (William Buckley) to attend the Directors Education Program (the DEP ), a joint program of the Institute of Corporate Directors and the Rotman School of Management, University of Toronto. Another director, Ms. Charlene Valiquette, is currently attending the DEP at the expense of the Company. All directors have been enrolled by the Company as members of the Institute of Corporate Directors. Directors should undergo education to update their skills and knowledge of the company, its businesses and key executives and to address ongoing and emerging issues in the functional areas of the board. Issuers should reimburse their directors for attending external education events. ShawCor provides it directors with management-led education and it also compensates directors for attending external education events. CCGG Disclosure of Governance Practices 14

17 Director Attendance and Committee Composition Vermilion Energy Inc., 2014 Proxy Circular, page 28: Vermilion highlights committee composition through a clear and comprehensive table. Moreover, director attendance at board and committee meetings also is summarized in a table. CCGG Disclosure of Governance Practices 15

18 Director Compensation Sun Life s disclosure of director compensation is detailed, well-organized and written in plain language. The disclosure covers several pages and is not reproduced in its entirety here. It begins with the following explanation of Sun Life s philosophy, approach and process: Sun Life Financial Inc., 2014 Proxy Circular, pages 35-38: CCGG Disclosure of Governance Practices 16

19 It lists the various fees and retainers paid to directors: It shows what each non-executive director was paid in the fiscal year, broken down by type of fee: CCGG Disclosure of Governance Practices 17

20 Finally, it also discloses director share ownership requirements and current director share ownership: CCGG Disclosure of Governance Practices 18

21 Director Evaluation Potash Corporation of Saskatchewan Inc., 2014 Proxy Circular, pages 16-17: Board, Committee & Director Assessment Pursuant to the PotashCorp Governance Principles, the Board has adopted a six-part effectiveness evaluation program for the Board, each Committee and each individual director, which is outlined in Appendix A under Other Board Committees Board Assessments and summarized in the following table. PotashCorp presents a tabular summary of its Board, Committee and Director Assessment processes. The table describes the parties responsible for the evaluation, the frequency of assessments and a summary of the actions and outcomes of each type of evaluation. CCGG Disclosure of Governance Practices 19

22 Executive Succession AltaGas Ltd., 2014 Proxy Circular, page 26: Succession Planning Further to the discussion above regarding the board of directors succession planning process, the HR Committee has developed a succession plan for the Chief Executive Officer. In addition, the HR Committee has an emergency succession plan in place, should it be required. The HR Committee is becoming increasingly more detailed and formalized in its succession planning process for the Chief Executive Officer, senior management and other strategic positions considered critical to the success of AltaGas. The HR Committee s succession planning process involves working with the Chief Executive Officer to review the internal talent pool on a regular basis, and selecting potential candidates, selecting executive development opportunities, and evaluating performance and progress, as well as planning for illness, disability and other unscheduled absences. This includes long range planning for executive development and succession to ensure leadership sustainability and continuity. For example, during 2013, several vice presidents and senior executives were moved to new or modified roles to provide developmental opportunities and increase the leadership bench strength of AltaGas. The HR Committee is responsible for ensuring AltaGas has appropriate programs for succession planning, overseeing human capital risk to ensure AltaGas management programs (including those for officers) effectively address succession planning, and reporting to the board of directors on succession planning matters. Given the importance of succession planning, it is a standing agenda item at each regularly scheduled HR Committee meeting, and succession plans are reviewed at least annually with the board of directors. Thomson Reuters Corporation, 2014 Proxy Circular, page 29: Succession Planning and Talent Management The HR Committee oversees succession planning and talent management for our company. Twice per year, the HR Committee devotes significant time reviewing our practices and progress with the CEO and Chief People Officer. One session typically focuses on the performance of the senior leadership team and the other focuses on talent management activities, particularly succession plans and the pipeline for the most senior leadership roles. In addition to a formal annual review of succession plans, the HR Committee deepens its knowledge of potential successors through a systematic exposure to high potential individuals While its primary focus is on succession planning at the CEO level, a highly engaged board is aware of and monitors succession planning efforts for all critical roles within the organization. Both examples shown above demonstrate a committee s role in executive succession planning activities. CCGG Disclosure of Governance Practices 20

23 Strategic Planning Oversight Companies should disclose the role of their board in overseeing the determination, execution and monitoring of the company s strategic plan. Strategic planning Canadian Pacific Railway, 2014 Proxy Circular, page 74: The Board oversees the development, execution and fulfillment of CP s strategic goals. This responsibility includes a strategic planning process whereby, prior to approval by the Board of CP s multi-year strategic plan (the Strategic Plan ): (i) the SOE Committee reviews and makes recommendations on the strategy, plans and objectives within the Strategic Plan that support continuous improvement in operating performance, and (ii) the Finance Committee reviews and makes recommendations on the financial aspects of, and strategic options and opportunities associated with, the Strategic Plan. As part of these reviews, such committees consider and discuss the key issues, assumptions, risks, opportunities and strategies that relate to the development and implementation of the Strategic Plan. One Board meeting per year is specifically set aside for a substantial strategic planning session in which the Board reviews and discusses the Strategic Plan developed by management, following which the Board provides its approval. As part of this, the Board considers CP s major opportunities, priorities and the risk impact of the Strategic Plan, and reviews and approves CP s financial objectives, including significant capital allocations. Subsequently, it oversees the implementation of the Strategic Plan and monitors CP s performance against plan. Canadian Pacific s circular explains how its board is involved in the strategic planning process. CCGG Disclosure of Governance Practices 21

24 Risk Management Oversight The financial crisis of recent years has heightened shareholders focus on risk management and oversight, yet risk oversight remains an area where disclosure often is lacking among Canadian issuers. Boards should disclose the processes used that enable them to identify and monitor risk management efforts. Ideally, disclosure should include: a perspective from the board of the primary risks facing the company a brief explanation of the board s involvement in defining the company s risk appetite and overseeing risk management how the board delegates and carries out its risk management oversight responsibilities how the board independently validates and scrutinizes the perspective presented by management on key risk issues. Cameco Corporation, 2014 Proxy Circular, page 33: RISK OVERSIGHT Over the last few years, management, the board and board committees have been devoting more time to the way we identify, manage, report and mitigate risk We use a common risk matrix throughout the company and consider any risk that has the potential to significantly affect our ability to achieve our corporate objectives or strategic plan as an enterprise risk. As a responsible corporation, we proactively address strategic, financial, operational, social and environmental risks and assess all risks against our four measures of success (see Measuring performance on page 67 for details). We manage risk in five broad categories: 1. strategic 2. financial 3. operational 4. human capital 5. social, governance and compliance. Each risk is assigned a rating and grouped into one of three tiers based on its severity or level of risk in our risk register. We develop action plans to mitigate each risk as part of our strategic planning and budgeting process. Employees own the risks and are responsible for developing and implementing controls to mitigate risk and for ongoing risk assessments. CCGG Disclosure of Governance Practices 22

25 Risks in the top tier are assigned to the board committees for ongoing oversight. The board enhanced the risk oversight process in 2013 by initiating quarterly presentations by management to the committees or, in some cases, the full board to allow a fuller understanding of the major enterprise risks and management s mitigation strategies. Committees receive presentations on additional enterprise risks throughout the year as requested. A formal risk management report is presented to the board annually The table below shows how the board and committees monitor risk across the organization. You can read about the board committees on page 36 and compensation risk on page 44. Cameco s disclosure of the role of the board and its committees in risk oversight is very good. Disclosure could be enhanced, however, by providing the board s perspective on high-priority risks. CCGG Disclosure of Governance Practices 23

26 The Toronto-Dominion Bank, 2014 Proxy Circular, pages 21-22: Some boards have established a separate committee that oversees risk. TD s risk committee writes a report to its shareholders, each year, explaining the committee s role in overseeing risk. CCGG Disclosure of Governance Practices 24

27 Shareholder Engagement There is a growing emphasis on shareholder engagement and best practices continue to evolve. CCGG recognizes that while boards may be able to meet with their largest institutional shareholders and groups like the CCGG, in-person meetings are not a practical forum for boards to engage with all shareholders. PotashCorp and Methanex provide a good example of reaching out to shareholders. Potash Corporation of Saskatchewan Inc., 2014 Proxy Circular, pages 32-33: Shareholder Outreach Reaching out to stakeholders and listening to their opinions is a core value of PotashCorp The Corporation carries out its shareholder outreach program through a variety of vehicles. In addition, we utilize our website as part of our shareholder outreach program, including the live streaming of our 2013 Annual Meeting of Shareholders. The website also includes the annual investor survey. We also continued our program of investor conferences and meetings In addition to the foregoing, investors are provided the opportunity to contact our Investor Relations department by letter, or phone on a continuing basis Methanex Corporation, 2014 Proxy Circular, page 20: 8. Shareholder Survey on Executive Compensation The Board appreciates the importance that shareholders place on executive compensation and believes that it is important to engage shareholders on this topic. With this in mind, the Company has again put in place a web-based survey to enable our shareholders to provide feedback on our approach to executive compensation as disclosed in this Information Circular. We intend to run this web-based survey on an annual basis. This year, the survey is accessible to shareholders at the Investor Relations section of our website ( from March 20, 2014 (the date this Information Circular was filed with securities regulators) until June 30, In order to submit comments, you are asked to provide your name and confirm that you are a current shareholder. Shareholders may comment generally or on specific aspects of our executive compensation and may provide as much detail as they wish. Shareholders who choose to provide an address may be contacted in order for the Board to better understand their particular concerns. All comments will be provided to the Chair of the Human Resources Committee and discussed at the July 2014 Human Resources Committee meeting to determine what actions are to be taken to address concerns raised. We will provide a report on this process in our annual disclosure documents next year. In 2013, we did not receive any feedback from shareholders on our shareholder survey on executive compensation. CCGG Disclosure of Governance Practices 25

28 Disclosure of Executive Compensation Compensation is one of the most powerful tools that boards have at their disposal for shaping the behaviour of company management. Compensation plans should reward performance and be aligned with CCGG s Executive Compensation Principles. Disclosure of a company s compensation plan should describe clearly how it is linked to the company s strategy, objectives and risk management. Compensation disclosure also should communicate the role of the board in designing executive compensation including the key factors considered by the board. This section shows examples of excellent disclosure of the following practices: Linkages between Executive Compensation and Corporate Strategy Linkages between Executive Compensation and Risk Management Variable Compensation Effectiveness of the Compensation Program over Time Management Biographies and Key Accomplishments Termination and Change of Control Benefits Executive Share Ownership Requirements Retirement Benefits and Perquisites Use of Discretion Compensation Consultants and Benchmarking Linkages between Executive Compensation and Corporate Strategy It is not sufficient merely to state how an issuer compensates its executive officers. CCGG expects issuers to explain the link between its corporate objectives and executive compensation. Letter to shareholders Sun Life Financial Inc., 2014 Proxy Circular, page 40: In 2013, we had a successful year of growth as we continued to execute against our strategic plan by concentrating on our four key pillars: a) Continuing to build on our leadership position in Canada in insurance, wealth management and employee benefits b) Becoming a leader in group insurance and voluntary benefits in the U.S. c) Supporting continued growth in MFS Investment Management (MFS) and broadening our other asset management businesses around the world d) Strengthening our competitive position in Asia. CCGG Disclosure of Executive Compensation 26

29 We believe our current compensation programs are structured to support the achievement of these strategic objectives. The performance targets used in our annual incentive plan (AIP) reflect financial and non-financial objectives that are aligned to the annual business plan approved by the board based on this strategy. Our long-term success on these strategic pillars will be reflected in both our absolute and relative share price performance, which are the key measures used in our long-term incentives and represent a significant portion of pay for our most senior leaders. In addition to incentives, providing competitive salaries and other pension and benefit programs ensures we attract and retain the talent needed to execute on our strategy. Sun Life s circular describes the link between the organization s strategic plan and the chosen long term performance measures (absolute and relative share price performance). Moreover, short term performance measures are linked to the company s strategic initiatives. Later in the circular, Sun Life provides details on these short term performance measures: Sun Life Financial Inc., 2014 Proxy Circular, page 54 CCGG Disclosure of Executive Compensation 27

30 Pembina Pipeline Corporation, 2014 Proxy Circular, page 50 Our approach to executive compensation Our strategy has four components: 1. Generate value by providing customers with safe, cost-effective, reliable services. 2. Diversify our asset base to provide integrated service offerings that enhance profitability and customer service. 3. Implement growth by pursuing projects or assets that are expected to generate cash flow per share accretion and capture long-life economic hydrocarbon reserves. 4. Maintain a strong balance sheet through the application of prudent financial management to all business decisions. We motivate our executives to focus on the success of the company by establishing a strong link between our strategy, corporate performance and compensation while building equity ownership Linking strategy, performance and compensation We align pay with strategy and performance by ensuring that: 1. the majority of executive compensation is variable and linked to performance; 2. performance is measured using metrics that are directly tied to our corporate strategy; 3. payouts of performance-based long-term incentives are linked to key long-term performance metrics relative to our peers; and 4. our compensation program takes into account the multi-year development horizons of our major energy infrastructure projects. Pembina discloses the corporation s strategy in the circular and then goes on to state that compensation is linked to strategy and performance. Later in the circular, Pembina elaborates on the performance measures that were used to determine the variable portion of executive compensation in Performance under the short term incentive plan is evaluated based on financial, operational and safety and environment measures. Performance under the long term incentive plan is measured based on total shareholder return vs the performance peer group and threeyear trailing average EBITDA per common share. CCGG Disclosure of Executive Compensation 28

31 Linkages between Executive Compensation and Risk Management Companies should disclose details of its executive compensation scheme through a risk oversight lens. The disclosure should explain how the design of the compensation plan and the use of board discretion serve to discourage risk-taking beyond the company s acceptable risk appetite, including the use of: caps on payouts performance thresholds long-term vesting provisions an anti-hedging policy that prohibits directors and officers from hedging their equity exposures a clawback policy that permits the company to recoup compensation already awarded in certain circumstances. Pembina Pipeline Corporation, 2014 Proxy Circular, pages 43-44: Managing compensation risk the human resources and compensation committee reviews and approves our compensation program and practices to align executive compensation with our short- and long-term goals, reflect financial, operating and share performance, dividend payments and individual performance and prevent risks that could have a material adverse effect on our company. This includes, among other things: 1. building a strong governance culture and ensuring effective oversight; 2. understanding the impact of operating and share price performance on payouts, and reviewing potential compensation over five years, to assess the effect of different performance scenarios; 3. using balanced measures, including qualitative and quantitative goals, to determine annual incentive compensation; 4. incorporating time and performance vesting features in long-term incentives; 5. using ranges for annual incentive and long-term incentive programs to make sure grants are effectively linked to actual performance and not unduly influenced by one-time events; 6. capping (as a percent of base salary) the amount executives can receive under the shortterm incentive plan; 7. requiring executives and directors to meet share ownership guidelines; and 8. requiring the full board to review and approve executive compensation recommendations. CCGG Disclosure of Executive Compensation 29

32 Compensation risk is also mitigated through our compensation governance measures, which include: 1. share ownership guidelines; 2. prohibiting executives and directors from hedging equity grants and building in safeguards against insider trading; and 3. applying a consistent compensation structure for the CEO, executive officers and all employees. We are implementing a new clawback policy by the end of 2014 that allows us to claw back incentive compensation from current and former executives when financial results have to be materially restated or corrected because of the executive s fraud or misconduct. The committee also ensures that our compensation plans and employee benefit programs are administered according to the laws and stock exchange policies that apply and our compensation objectives. The committee believes this balanced use of performance elements reduces compensation risk by eliminating reliance on any single or limited number of factors to determine eligibility and diversifying potential reward scenarios, and ensures that compensation aligns with the interests of our shareholders. Pembina provides detailed disclosure of how its human resources and compensation committee manages compensation related risk. 2. Clawback Policy Loblaw Companies Limited, 2014 Proxy Circular, page 26: In 2011, the Governance Committee introduced a clawback policy on STIP and LTIP payments for senior executives including the NEOs when (i) an executive engages in conduct that results in the need for the correction or restatement of financial results, (ii) the executive receives an award calculated on the achievement of those financial results, and (iii) the award received would have been lower had the financial results been properly reported. The clawback policy also provides that a clawback may be triggered if an executive commits a material breach of the Corporation s Code of Conduct. The policy requires that when the clawback is triggered, the executive must repay all of the incentive payments received over the two-year period preceding the triggering event. CCGG Disclosure of Executive Compensation 30

33 In its risk mitigation practices, Loblaw lists and explains its Clawback Policy. The section is a good example of a clawback policy that is triggered for a reason in addition to just financial restatement. Variable Compensation In assessing the degree to which executive compensation is truly at-risk, CCGG looks for a company s disclosure to answer the following questions: What proportion of target total compensation is variable? What is the range of potential payments under each variable compensation payment? Do specific vesting provisions apply to share based compensation? If so, do these provisions include both time- and performance-vesting provisions? Bank of Nova Scotia, 2014 Proxy Circular, pages 28-29: CCGG Disclosure of Executive Compensation 31

34 BNS disclosure clearly illustrates each component of compensation and each component s: purpose performance period, if any relative risk of payout proportion of target total direct compensation. The disclosure also notes that senior employees have greater ability to affect results over the long-term and accordingly a greater proportion of their compensation is variable. CCGG Disclosure of Executive Compensation 32

35 Precision Drilling Corporation, 2014 Proxy Circular, page 57: Precision Drilling s circular provides a table that shows the following important details regarding each component of executive compensation: Form of award Performance Period (including vesting criteria) Relative risk of payout How the value of the award is determined How the award is settled i.e. in cash or using shares from treasury. Of note, the three types of awards classified as At-risk, in the table shown above, are truly at risk i.e. a zero payout is possible if certain thresholds are not met. Effectiveness of the Compensation Program over Time In order to truly understand the effectiveness of an issuer s compensation program, shareholders need to know not only the grant date value of compensation awards, which reflects how the board intended to compensate management, but also how effective the compensation program has actually been in aligning management s interests with shareholders. Compensation disclosure should include: a discussion of whether a board considers outstanding and realized equity awards when considering future equity awards a table or chart showing the realized value of past compensation awards CCGG Disclosure of Executive Compensation 33

36 a chart comparing compensation awards against the actual results of key performance metrics used in the compensation plan affirmation of any forward-looking stress tests the board may have conducted when making compensation decisions and the results of those tests. The Toronto-Dominion Bank, 2014 Proxy Circular, page 43: CEO Performance Compensation During Tenure The following table compares the grant date value of compensation awarded to Mr. Clark in respect of his performance as CEO with the actual value that he has received from his compensation awards during his tenure. The actual compensation that he has received includes salary and cash incentive payments, as well as the value at maturity of share units granted (or current value for units that are outstanding), the value of stock options exercised during the period, and the in-the-money value of stock options that remain outstanding. This analysis allows the committee to consider compensation outcomes for the CEO when determining new awards. CCGG Disclosure of Executive Compensation 34

37 Some issuers have included in their circulars the realizable value of Options and PSUs based on year end stock prices. Disclosing realizable value of options and PSUs is a good practice but this value does not reflect the actual compensation that is realized by the executive. TD s circular includes a look-back table which shows the grant date values of the CEO s compensation for each year of his tenure and the sum of the realized value and the value of any awards still outstanding as of the most recent year-end. The table also compares the actual compensation the CEO received to the value of a $100 shareholder investment in each of those years. Potash Corporation of Saskatchewan, 2014 Proxy Circular, page 71: The above chart compares the total annual compensation, which is comprised of fixed compensation, equity compensation and awards under the STIP earned by the Corporation s Named Executive Officers from 2005 through 2013 to PotashCorp s annual CFROI and WACC during the same period. CFROI-WACC is the performance metric used to determine vesting of performance options granted under the annual POP and is correlated with corporate TSR. While total Named Executive Officer compensation was not directly correlated to CFROI-WACC between 2005 and 2013, the general trend in total Named Executive Officer compensation was consistent with the general trend in CFROI-WACC. CCGG Disclosure of Executive Compensation 35

38 Because awards under PotashCorp s incentive plans are capped at certain maximum performance levels, there was a substantial increase in CFROI-WACC between 2006 and 2008 while levels of total Named Executive Officer compensation during the same period were relatively stable. In 2009, because the Corporation failed to achieve the minimum corporate financial performance required under the STIP, no STIP awards were earned by PotashCorp s Named Executive Officers. Furthermore, the equity compensation levels in 2006, 2009 and 2012 reflect the payout of a multi-year award under the MTIP, reflecting performance in each respective prior three-year period. For purposes of the above chart, fixed compensation includes base salary and other compensation, which includes perquisites and personal benefits. Equity compensation includes the grant-date fair value of awards under the MTIP and annual POPs. PotashCorp discloses a chart that shows the grant date value of each of its compensation awards relative to performance under one of the company s primary performance metrics (the spread between CFROI and WACC). The above excerpt provides a good example of how PotashCorp s executive compensation has worked over a significant length of time. CCGG Disclosure of Executive Compensation 36

39 Management Biographies and Key Accomplishments To understand the appropriateness of a company s executive compensation plan and its compensation decisions, shareholders need to have some understanding of the roles and responsibilities of all NEOs and their qualifications. TransCanada explains each NEO s roles and responsibilities and provides shareholders with a brief overview of each NEO s 2013, 2012 and 2011 direct compensation. TransCanada Corporation, 2014 Proxy Circular, pages 89-93: CCGG Disclosure of Executive Compensation 37

40 Termination and Change of Control Benefits In seeking to understand the employment agreements between an issuer and its NEOs, including their minimum share ownership requirements, CCGG looks for compensation disclosure to answer the following questions: Does the company have employment agreements with its NEOs? What are the material terms of the agreements? What payment, if any, is awarded o if a NEO resigns? o if a NEO is terminated without cause? o if a NEO is terminated without cause after a change of control occurs? o if a change of control occurs but a NEO is not terminated? How a change of control is defined? Are change of control provisions double-trigger? What payments would be made to NEOs under each termination scenario if their employment had been terminated at year-end? Methanex Corporation, 2014 Proxy Circular, pages 50-52: Change of Control and Termination Benefits for NEOs The Company has entered into employment agreements with each of the NEOs that provide them with certain rights in the event of involuntary termination of employment or a Change of Control of the Company. A Change of Control occurs when: 1) more than 40% of voting shares of the Company are acquired by an outsider; 2) a majority change in the Board of Directors of the Company occurs; 3) all or substantially all of the assets of the Company are sold to an outsider; or 4) a majority of directors determines that a change in control has occurred. Change of Control benefits are granted to motivate executive officers to act in the best interests of the Company s shareholders in connection with a change of control transaction by removing the distraction of post-change of control uncertainties faced by the executive officers with regard to their continued employment and compensation. The employment agreements with the NEOs provide for a double trigger for grants of stock options and/or SARs/TSARs. A double trigger means that early vesting of stock options and/or SARs/TSARs requires the occurrence of both (1) a Change of Control and (2) either termination of the NEO s employment or the NEO suffers an adverse material change in his employment status within 24 months following a Change of Control. The Company believes that double trigger change of control compensation is consistent with market practices and is attractive in maintaining continuity and retention of executive officers. Severance benefits stated in the employment agreements are CCGG Disclosure of Executive Compensation 38

41 appropriate because both the Company and the executive officer have a mutually agreed upon severance package that is in place prior to any termination event. The following table shows the provisions in the employment agreements of the NEOs as at December 31, 2013 in the event of a termination of employment: Methanex s circular includes all the information discussed above. CCGG Disclosure of Executive Compensation 39

42 Executive Share Ownership Requirements Companies should consider adopting share ownership requirements for its NEOs to enhance alignment of interests with the company s shareholders. Additionally, disclosure should answer the following questions: What are the minimum share ownership requirements that each NEO must meet? Are NEOs required to maintain minimum share ownership levels for any period of time after leaving the company? What are each NEO s current shareholdings relative to the required holdings level? Do in-the-money option grants and unvested equity grants count towards an NEO s minimum ownership requirements? Bank of Nova Scotia, 2014 Proxy Circular, pages 32-33: Executive Share Ownership Guidelines In support of our goal of aligning executive and shareholder interests and discouraging undue and excessive risk taking, all of our executives must meet minimum share ownership requirements. In addition, the CEO and his direct reports are subject to postretirement retention requirements. The required holdings reflect the executive s compensation and level, and may be satisfied through holdings of common shares, as well as any outstanding DSUs, RSUs, PSUs and DPP units and holdings in our Employee Share Ownership Plan. Newly appointed executives have three years to meet the share ownership requirements. The table below summarizes the minimum ownership requirements by level: CCGG Disclosure of Executive Compensation 40

43 All of the NEOs have exceeded the minimum share ownership guidelines, as outlined in the following table: Note on Trading Restrictions: Effective with the December 2010 grants, to be eligible to receive equity-based awards executives must attest that they do not use personal hedging strategies or compensationrelated insurance to undermine the risk alignment effects embedded in our compensation plans. All of our employees, including executive officers are prohibited from entering into short sales, calls and puts with respect to any of our securities. These restrictions are prohibited under the Bank Act, and are enforced through our compliance programs. In addition, executive officers are required to seek pre-clearance from our compliance department prior to buying or selling any of our publicly traded securities, including stock options. BNS disclosure with respect to NEO share ownership meets all of our best practices. Retirement Benefits and Perquisites In reviewing executive perquisites and retirement benefits, CCGG looks for compensation disclosure to answer the following questions: Has the company granted an NEO bonus years of pension service beyond those years actually worked? Does the company have a policy on whether it will do so in the future? Does the company have caps, either hard-dollar or otherwise, on pension benefits? Does the company have any policies governing the use of perquisites for executives, particularly for controversial perquisites such as personal use of corporate aircraft or tax-gross ups? CCGG Disclosure of Executive Compensation 41

44 Benefits and Perquisites Vermilion Energy Inc., 2014 Proxy Circular, pages 54-55: Our benefits plan provides all employees with extended health and dental coverage, life insurance, employee assistance program and disability insurance. Executives have the opportunity to participate in executive health benefits; however, participation in this program is not mandatory. Costs for NEOs have been included in the Summary Compensation Table on page 70. We limit the use of perquisites special benefits for our executives as we do not think they should be a significant element of compensation. We do, however, understand that some perquisites are appropriate to keep us competitive. The Governance and Human Resources Committee reviews routinely perquisites to ensure they are appropriate and market competitive. We provide the following perquisites to executive officers. Savings Plan Funds contributed to our savings plan are used to buy Vermilion shares on the open market. Executives participate in the same plan as employees and are eligible to receive the same contribution level of 1.5 times the executive/employee contribution to a maximum Vermilion contribution of 10.5% of base salary earned. The purpose of the savings plan is to encourage ownership; we believe that executives and employees should be Shareholders. Shares within the savings plan are restricted from sale for a one year period from the contribution date. Where the restricted shares are withdrawn, a penalty is applied and the executive/employee loses Vermilion s matching contribution for a period of three months. In 2013, a total of 109,224 shares were purchased on the TSX in the savings plan at prices per share between $45.92 and $ Our savings plan is not funded from treasury. Vermilion s disclosure provides an answer to all of the questions listed above. CCGG Disclosure of Executive Compensation 42

45 Use of Discretion The use of board discretion is an important consideration for many shareholders when assessing executive compensation disclosure. Situations may arise in which unforeseen circumstances cause formula-driven compensation decisions to be inappropriate, but the use of discretion to increase compensation awards in years of poor performance may prompt shareholder concern that discretion is being used inappropriately. In order to mitigate these concerns, compensation disclosure should: fully explain under what circumstances the board might reasonably expect to exercise discretion state whether discretion was used to adjust awards during the current year or in the recent past, and if so, why state the degree to which the use of discretion (if applicable) affected actual compensation awards and if it would be exercised in the inverse situation to an equal but opposite degree state if there are any limits or rules governing the use of board discretion. ShawCor Ltd., 2014 Proxy Circular, page 26: Preservation of Board discretion to manage questionable circumstances The Board retains discretion to alter, cancel or defer amounts payable under annual and longterm incentive plans, other than the Company s stock option plan, should the plans trigger an inappropriate result or should the Company report a negative net income in a particular year. ShawCor discloses that its board has the right to use discretion. The above excerpt gives shareholders a broad sense of what circumstances may lead to the use of discretion by the board. Compensation Consultants and Benchmarking Compensation structure is often complicated and many boards seek outside advice to help design compensation plans. Boards also commonly benchmark compensation against peers to ensure the company pays in a manner that is competitive. We caution that the practice of benchmarking against peers should not be overly relied upon at the expense of a robust, independent analysis. When external consultants are retained by the board, the board, as a governance best practice, should ensure that the consultant is independent of management. In any event, while the input received from independent compensation consultants may provide valuable assistance to the board, it does not necessarily validate the approach to executive compensation nor does it reduce the board s responsibility to ensure that compensation decisions are appropriate and closely aligned with performance. Boards should disclose answers to the following questions: Does the compensation committee make use of an independent compensation consultant? CCGG Disclosure of Executive Compensation 43

46 If management retains the same compensation consultant as the committee, must the committee first give its approval? If so, what portion of the consultant s total fees was attributable to work done for management? To the extent peer group benchmarking is used, does it serve solely to inform the board or does the board target a specific range or percentile level for compensation relative to its chosen peer group? What companies comprise the peer benchmarking group and what is the rationale for including the peers that were chosen? Vermilion Energy, 2014 Proxy Circular, page 55: Like most companies, Vermilion discloses its peer selection criteria and the selected peers. What sets Vermilion apart is the disclosure in brief of peer size using four measures, as well as the peer group average, relative to Vermilions size. CCGG Disclosure of Executive Compensation 44