2017 Trends in Corporate Governance Best Practices

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1 2017 Trends in Corporate Governance Best Practices Speakers: Christopher A. Chen & Abbey Goodine October 19, 2017

2 What we will cover in 60 minutes 1. The approach we took The 2017 GPC Hay Group Corporate Governance Practices Survey 2. What we found Reflecting the key trends of corporate governance in Canada 3. Insights into one of the top Board matters Diversity & inclusion 2017 Korn Ferry. All rights reserved 2

About Korn Ferry A total approach to talent Korn Ferry Executive Search helps you attract the best executive talent for moving your company in the right direction.

3 About Korn Ferry A total approach to talent Korn Ferry Executive Search helps you attract the best executive talent for moving your company in the right direction. Korn Ferry Hay Group helps you align your people and your organization to your strategy developing, engaging and rewarding your employees to reach new heights. Korn Ferry Futurestep delivers professional talent that builds up leadership Korn Ferry. All rights reserved 3

5 Survey methodology What is it? GPC and Hay Group 5 th annual Corporate Governance practices survey Online survey Conducted with over 100 companies across Canada GPC Excellence in Governance awards Results used during the nomination process We supplement our survey findings with results from Korn Ferry s annual report on Corporate Board Governance and Director Compensation in Canada 2017 Korn Ferry. All rights reserved 5

6 Focus of our research Corporate governance overview Corporate sustainability governance Compensation communication Enterprise risk management oversight and governance Engagement by a governance team Subsidiary governance Effective Board and committee operations Boardroom diversity 2017 Korn Ferry. All rights reserved 6

7 Participant background Respondents by industry Industries with the most responses are the broader public sector (30%) and financial sector (25%). 30% 8% 2% 3% 10% 23% 25% Consumer Financial Industrial Life science Technology Professional services Broader public services 27% from not-for-profit 55% up to 500 employees 31% More than $1 billion in revenue 2017 Korn Ferry. All rights reserved 7

9 What are your most significant corporate governance issues? Most significant corporate governance issue Risk management and oversight CEO succession planning Board diversity Cyber risk Executive bench strength and succession Dynamic regulation compliance and its impact on business Shareholder interaction Corporate sustainability Subsidiary governance Crisis readiness Independent board leadership Executive compensation Amount of disclosure No issue CEO performance/evaluation Development of conflict management culture Financial reporting Other 2% 2% 13% 11% 11% 11% 10% 9% 8% 7% 5% 12% 21% 20% 22% 27% 26% 36% 2017 Korn Ferry. All rights reserved 9

10 What are the most critical types of risks faced by your organization today? Most critical types of risks Operational risk 59% Reputational risk 50% Cyber / technological / IT risk 46% Financial risk 43% People risk Compliance-related risk Strategy risk Governance risk 21% 21% 20% 17% Environmental risk 12% Financial reporting risk Compensation risk Other 1% 2% 2% 2017 Korn Ferry. All rights reserved 10

11 What are the top issues for your Board? Top three Board matters (1 being most important) Strategic planning 31% 20% 18% Risk management 23% 26% 16% Succession planning 18% 16% 13% Information technology issues 7% 9% 16% Ranked 1 Ranked 2 Developing human capital 8% 12% 11% Ranked 3 Regulatory compliance 6% 7% 14% Crisis management / planning 5% 6% 13% Executive compensation 5% 1% 2% 2017 Korn Ferry. All rights reserved 11

12 What is your opinion on the impact of corporate governance codes and legislation? Impact of corporate governance codes and legislation No match 60% Positive Neutral Negative/room for improvement No match 50% 40% 30% 20% 10% 0% Korn Ferry. All rights reserved 12

15 Corporate sustainability governance Formal sustainability policy Frequency of sustainability policy review 44% 27% 11% Yes, fully implemented Yes, being implemented No, but under consideration 40% 4% 6% 50% At least every six months Annually As needed 19% No Never What we found: 27% of respondents have a fully implemented formal sustainability policy in place. One half review the policy annually Korn Ferry. All rights reserved 15

16 Sustainability initiatives Sustainability initiatives Improving energy efficiency Enhancing impact on local communities 64% 66% Improving environment around facilities Going paperless in the workplace 50% 54% Green standards in product specification Cutting emissions or pollutants 35% 39% Other 20% What we found: 66% of organizations have improving energy efficiency as a sustainability initiative in place. Publicly traded organizations have implemented the largest number of initiatives per organization Korn Ferry. All rights reserved 16

17 Performance related to sustainability What we found: For almost one third of organizations, the Board assesses management's performance on sustainability initiatives every six months or on an annual basis. Management sustainability evaluation At least every six months 9% 19% Annually Once every two years 22% As needed Never 26% 2017 Korn Ferry. All rights reserved 17

20 Documentation of discussion Discussion of executive compensation in disclosure material 7% 17% 37% Yes, in great details Yes, high level only No, but under consideration No and not planning to disclose What we found: More than 75% of organizations discuss executive compensation in their disclosure material. 39% 2017 Korn Ferry. All rights reserved 20

21 Clarity of disclosure document Stakeholder's perception on clarity and conciseness of the language in the executive compensation disclosure document 57% 31% 11% Yes Yes, compared to disclosure documents in other organizations Unsure, have never conducted a survey to determine stakeholder s perception What we found: Approximately one third of the participants felt their document was objectively clear and concise. However, the majority of participants have never conducted such a survey on perception before Korn Ferry. All rights reserved 21

22 Completeness and transparency Description of the compensation decision-making process in executive compensation disclosure document 29% 25% 27% 18% Yes, outlines a formal process and clearly defined roles Yes, outlines a formal process Yes, a general description provided No What we found: 27% of the respondents reported that their executive compensation disclosure document contains a description of the formal compensation decision making process with clearly defined roles Korn Ferry. All rights reserved 22

25 Formal risk policy What we found: The number of organizations with a fully implemented formal risk policy has decreased from last year by 11%. Financial and publicly traded organizations have the largest percentage of respondents with a fully implemented formal risk policy. 61% 72% 47% 47% Yes, fully implemented Presence of formal risk policy 18% 15% 17% 17% 14% 11% 12% 14% Yes, being implemented No, but under consideration 9% 4% 22% 20% No Korn Ferry. All rights reserved 25

26 Barriers to risk oversight process Barriers to risk oversight process Gap in risk reporting 47% Lack of clarity, definition and agreement about enterprise risk management philosophy 29% Lack of understanding of risks by board members 28% Misalignment of risk appetite framework between the board and management Enterprise risk management is not perceived as valuable or as a priority 13% 15% Lack of understanding of risks by management 11% Organization culture is not supportive 8% Other 29% 2017 Korn Ferry. All rights reserved 26

27 Risk management disclosure Risk disclosure material What we found: 7 out of 10 organizations discuss risk oversight and risk management in disclosure material. 15% 15% 23% Yes, in great details Yes, in high level only No, but under consideration No and not planning to disclose 46% 2017 Korn Ferry. All rights reserved 27

28 Ethics and risk What we found: 93% of organizations have an employee business conduct and ethics policy in place. 79% of organizations require all employees to sign an agreement. Employee business code of conduct and ethics policy 14% 7% 79% Yes, all employees must sign an agreement Yes, but no formal signed agreement by employees No 2017 Korn Ferry. All rights reserved 28

31 Frequency of Board interaction Board's interaction with shareholders What we found: More than half of participating organizations schedule a structured meeting or call with shareholders at least once per year. 27% 20% 53% Our board schedules a structured meeting or call with shareholders at least once per year Board members will meet with shareholders only if asked The board does not interact directly with shareholders and relies on executives to do so 2017 Korn Ferry. All rights reserved 31

32 Stakeholder groups Interaction with stakeholder groups What we found: Respondents tend to interact most frequently with the regulators and media, a trend that has remained consistent over the past four years. Regulators Media Analysts Institutional investors Retail shareholders Proxy advisory firms 18% 27% 33% 30% 65% 63% Other 43% 2017 Korn Ferry. All rights reserved 32

33 Relationship between the IRO and Board Relationship between the IRO and Board 82% 78% Completely Agree 16% 17% 2% 5% Neutral Completely Disagree Investor Relations Officer (IRO) role is more important due to changing rules and regulations The Board understands the role and responsibilities of the IRO and seeks advice 2017 Korn Ferry. All rights reserved 33

36 Degree of separation What we found: 84% of organizations have a separate Board of Directors for the organization s significant subsidiaries. 82% of organizations with subsidiaries have Directors who serve the Boards of both the parent company and its subsidiaries. Separate Boards of Directors for organization s significant subsidiaries 16% Directors on both the Boards of the subsidiaries and the parent company 18% 84% Yes No Yes No 82% 2017 Korn Ferry. All rights reserved 36

37 Integration What we found: The most common practice for Boards is to discuss subsidiary business and risk oversight on an ad-hoc basis. The second most common practice is to discuss the matter in every Board meeting. Subsidiary business and risk oversight discussion 49% 2% 4% 44% Every meeting Every second meeting On an ad-hoc basis Never 2017 Korn Ferry. All rights reserved 37

38 Director orientation and education Formal orientation / on-boarding for new Directors of the subsidiary Board What we found: Formal orientation / on-boarding programs are present in more than half of the participating organizations. One-third of the participants reported having a continuing education program available for subsidiary Directors. 43% 57% Yes Director continuing education program in place for subsidiary Directors 33% Yes No No 67% 2017 Korn Ferry. All rights reserved 38

40 What we explored 1. Board committees 2. Board meetings 3. Management performance evaluation 4. CEO succession planning 5. Board performance evaluation 6. Director orientation and education 2017 Korn Ferry. All rights reserved 40

41 Board committees Audit 92% Governance 83% Compensation / human resources 77% Finance 64% Nomination Risk 50% 53% Investment 35% Safety / health / reliability Pension 27% 26% Social responsibility / sustainability 19% Reserve 10% Other 33% What we found: Audit, Governance, and Compensation/Human Resources have remained the top three most common Board committees since Korn Ferry. All rights reserved 41

42 Board meetings What we found: In 2017, the most common Board meeting frequency is 3-6 times/year. Since 2016, the frequency of Board meetings has significantly decreased for 7-10 meetings per year. >10 times 7-10 times 3-6 times 0-2 times 2% 3% 1% 11% 19% 16% 18% 30% 33% 35% 39% 50% 49% 48% 46% Korn Ferry. All rights reserved 42

43 Management performance evaluation Uses a balanced scorecard approach (financial, operational, people, customer) Includes development objectives to support the CEO in improving his/her performance 41% 62% Includes a formal 360 degree leadership assessment 24% Largely discretionary by the board 19% No performance evaluation process in place 10% Based purely on financial measures tied to last year s performance 6% 2017 Korn Ferry. All rights reserved 43

44 CEO succession planning CEO succession planning process CEO succession planning process Yes, fully implemented Yes, being implemented No, but under consideration 11% 17% 17% 15% 20% 20% 22% 21% 37% 40% 39% 50% Emergency replacement plan for the CEO Forward-looking CEO role profile aligned to the organization s strategic direction Leadership development program to ensure leadership continuity Systematic process to identify executive succession talent (direct reports to CEO) Systematic process to identify internal CEO succession talent bench 45% 41% 35% 35% 31% No 31% 23% 12% 25% Formal, comprehensive assessment of CEO succession candidates Regular scan of external CEO talent in the market/industry 10% 19% What we found: 39% of the organizations have fully implemented a formal CEO succession planning process. This is a decrease from 50% in An emergency replacement plan remains the most common approach for CEO succession planning Korn Ferry. All rights reserved 44

45 Board performance evaluation Formal Board performance evaluation policy 80% 65% 67% 67% Yes 35% 33% 33% No 20% What we found: 67% of organizations have a formal policy for Board performance evaluation. This has significantly decreased from 80% since Korn Ferry. All rights reserved 45

46 Director orientation and education Board education topics Industry specific topics 76% Risk oversight Organization policies 67% 71% Financial and liquidity risk Regulatory issues Ethics 46% 50% 53% Compensation 37% Market risk 32% Anti-corruption policies Insider trading 14% 13% Political contributions 9% Other 14% 2017 Korn Ferry. All rights reserved 46

49 Board diversity policy Formal Board diversity policy What we found: The number of Boards with a fully implemented policy on boardroom diversity has decreased since % 43% 23% 14% Yes, fully implemented 6% 4% 12% 7% Yes, being implemented 17% 26% 24% 38% No, but under consideration 44% 42% 40% 28% No Korn Ferry. All rights reserved 49

50 Gender, visible minority and ethnic diversity Facts & Figures within the Canadian Boardroom 4 Average number of Committees 91% Boards with female representation 49% Boards with visible minority representation 32% Boards including non-canadians 41 years Average age of the youngest Director Gender diversity: Of the organizations with female representation, 14% of organizations have 1 female, and 86% have 2+ females. Visible minority diversity: There is a member of a visible minority on the Board for almost half of the organizations. 53 years Average age of Board Directors 66 years Average age of the oldest Director 5+ years Typical tenure Ethnic diversity: Of the Boards who have a non- Canadian Director, the number ranges from 1 to Korn Ferry. All rights reserved 50

51 Gender diversity Women comprised 17% of the Directors on the boards. This is an increase of 2% over last year, and is the highest level in 22 years Of the Directors that were newly elected to boards in 2015, 33% were female, compared to 27% in 2014 The average age was 57 (compared to 59 for newly elected males) 29% were not a resident of Canada 44% had a financial background *Results from 2016 Report on Corporate Board Governance and Director Compensation in Canada 2017 Korn Ferry. All rights reserved 51

53 Board recruitment policy What we found: 61% of organizations have a fully implemented formal Board recruitment policy in place, covering practices surrounding Director nomination and election. This number has decreased by 9% since % 27% 7% Board recruitment policy Yes, fully implemented Yes, being implemented No, but under consideration 61% No 2017 Korn Ferry. All rights reserved 53

54 Priority diversity & inclusion issues Gender Canadian women continue to earn less than men in Canada. According to the Organization for Economic Cooperation and Development, the wage gap is more severe in Canada than in the US. Women do not hold as many leadership positions as men. As of 2013, women in Canada still earn on average 25% less than men do. Canadian women hold only 17% of corporate officer positions in Financial Post 500 companies and 22% of seats in the House of Commons. Generational differences and an aging workforce For decades, the 9.6 million Canadians born between 1946 and 1965 have been the single largest demographic in Canada s labor force. Presently, the oldest of the baby boomer generation has reached retirement age. Canada s aging workforce presents a multitude of challenges including: future productivity, skills shortages and sources of replacement workers. Disability As of 2013, just over one in 10 Canadians reported having a disability. With the aging of the baby boom generation, there might be more employees with age-related disabilities in the workforce Korn Ferry. All rights reserved 54

55 Priority diversity & inclusion issues (cont d) Sexual orientation In 2005, same-sex marriage was legalized. This change has resulted in greater societal acceptance of the LGBTQ+ community. Despite this legislative change, LGBTQ+ workers still report that organizations have not updated their benefits policies to reflect changes to law. Aboriginal population Three main groups compose Canada s aboriginal population of about 1.4 million (As of 2011): First Nations (North American Indian), Métis and Inuit all of whom have distinct traditions and languages in their respective jurisdictions. In general, aboriginal workers have low levels of formal education and a lack of work experience. These factors impact their future success in the workplace Korn Ferry. All rights reserved 55

56 Diversity snapshot for Canada Demographic Geography Major Metro Areas Languages Overview Canada is the second-largest country in world (after Russia). Approximately 90% of the population is concentrated within 100 miles of the US border. It consists of 10 provinces, including, Quebec, British Columbia, Nova Scotia, Ontario, Alberta, Saskatchewan, Manitoba, Newfoundland & Labrador, Prince Edward Island and New Brunswick. The 3 territories are Northwest Territories, Nunavut, and Yukon. Canada s four largest provinces (Ontario, Quebec, British Columbia, and Alberta) are also its most populous. They account for 86% of the country s population. Canada s major metropolitan areas are: Toronto, Montreal, Vancouver, Calgary, and Edmonton. French and English are both official languages of Canada. Over 86.3% of Canadians have working knowledge of English while only 29.8% have a working knowledge of French. Population More than 36,286,400 people live in Canada. Workforce The workforce participation rate is 65.7% and the unemployment rate is 7.0%. Race/Ethnicity Gender Generations Based on the 2011 National Household Survey, the population is: 61.4% White, 15.3% Asian, 5.6% Aboriginal, 2.3% African American, and 1.7% Hispanic or Latino. In 2016, 18.3 million females accounted for 50.4% of the total population, continuing a slim female majority that has held for over three decades. 62% of the female population participate in the workforce. However, women in Canada still earn on average 25% less than men do, based on annual earnings of full-time full-year workers. The labour force survey estimates is broken down into the following four age groups: 15 to 24 years: 2,429,100, 24 to 44 years: 7,834,600, 45 to 64 years: 7,069,300, 65 years and over: 747,000 Religion Catholic 40.6% (includes Roman Catholic 38.8%, Orthodox 1.6%, other Catholic.2%), Protestant 20.3% (includes United Church 6.1%, Anglican 5%, Baptist 1.9%, Lutheran 1.5%, Pentecostal 1.5%, Presbyterian 1.4%, other Protestant 2.9%), other Christian 6.3%, Muslim 3.2%, Hindu 1.5%, Sikh 1.4%, Buddhist 1.1%, Jewish 1%, none 23.9% (2011 est.) Disability As of 2013, 13.7% of Canada s population identified themselves as disabled. LGBTQ+ The Canadian Community Health Survey from 2014 found that 1.7% of Canadians ages18-59 consider themselves gay or lesbian, and an additional 1.3% consider themselves to be bisexual. As of 2005, same-sex marriage was legalized in Canada Korn Ferry. All rights reserved 56

The bottom line: Leveraging diversity & inclusion yields

We have five key beliefs about diversity &

Pay equity Most countries or regions have some sort of legislation around this In Canada the most demanding jurisdictions are Quebec, Ontario and Federal New pay equity laws are currently being

62 Pay equity Most countries or regions have some sort of legislation around this In Canada the most demanding jurisdictions are Quebec, Ontario and Federal New pay equity laws are currently being explored in the United States and New Zealand Pay equity laws require that women and men within the same establishment be paid the same for work of equal value Goal is to stop discrimination related to under-valuation of work traditionally performed by women Equal pay for work of equal value 2017 Korn Ferry. All rights reserved 62

63 New federal pay equity legislation Canada s federal pay equity legislation operates on similar principles to Ontario and Quebec legislation but has a different approach to compliance The current Federal pay equity legislation takes a complaints-based approach The new legislation is expected to require employers to submit proof of compliance but it s not yet clear what specifically will need to be done to prove compliance The core of the legal requirement is to use a gender neutral job evaluation plan and a bias-free process to prove equal pay opportunities for male and female job classes Ontario and Quebec employers may have the building blocks in place, but many federally regulated organizations in other jurisdictions have not put pay equity measures in place 2017 Korn Ferry. All rights reserved 63

64 Are you impacted? You will be impacted if you fit into any one of the following categories: federal government, agencies, crowns federal financial services organizations marine shipping, ferry and port services air transportation, including airports, aerodromes and airlines railway and road transportation that involves crossing provincial or international borders canals, pipelines, tunnels and bridges (crossing provincial borders) telephone, telegraph and cable systems radio and television broadcasting grain elevators, feed and seed mills uranium mining and processing 2017 Korn Ferry. All rights reserved 64

65 Limitations of pay equity laws Pay equity legislation forces employers to take steps intended to uncover unconscious bias in our pay and employment practices BUT You can t close the pay gap through pay equity. You can measure the pay gap through pay equity. Closing the pay gap is about aligning a sophisticated D&I strategy that s informed by your pay equity findings Korn Ferry. All rights reserved 65

Canadian Management Committee. He advises clients on supporting stakeholder value through effectively aligning organizational strategy to executive compensation. Email: christopher.chen@kornferry.

66 Who to contact Christopher A. Chen Christopher is a Senior Client Partner and Canadian Practice Leader for Executive Pay & Governance, based in Toronto ON, and sits on Hay Group s Executive Reward Global Leadership Team and the Canadian Management Committee. He advises clients on supporting stakeholder value through effectively aligning organizational strategy to executive compensation. christopher.chen@kornferry.com Tel: Abbey Goodine Abbey Goodine is an Associate Consultant for Executive Pay & Governance and is based in Toronto, ON. Abbey has managed the Annual GPC Best Practices in Corporate Governance Survey for the past two years, where she has reported market trends in topics such as corporate governance and board diversity to facilitate corporate governance decision making in organizations across Canada. abbey.goodine@kornferry.com Tel: Korn Ferry. All rights reserved 66

CIBC Annual Accountability Report 2005 For what matters

22 CIBC in Society > Our People CIBC Annual Accountability Report 20 Our People CIBC in Society Strategy Fulfilling our Mission to create a work environment where all employees can excel is fundamental