Of all the improvements FirstService Corp. made to its corporate governance practices last year, chairman and founder Jay Hennick says one change was by far the most difficult.
"My dad," he says quickly. "That was the hardest for me."
The Toronto-based firm, which owns stakes in an array of companies that provide services such as property management and building security, decided last year to reshape its board of directors to have a majority of independent directors and fewer members of the board who had relationships with management. Among the three directors who left the board was Mr. Hennick's father, Sam Hennick, who had been on the board since the company went public in 1993, and was one of the first investors when his son started off with a swimming pool management company as a teenager.
"It was the right thing to do from a corporate governance perspective, but it was hard to do," Jay Hennick says. "He was great about it; he made it so easy ..... It was probably harder on me. This is the guy I grew up with. I seek his advice every two seconds. I speak to him four times a day on the phone. That was hard. Everything else was easy."
The Report on Business new ranking of corporate governance practices in Canada found that FirstService posted the greatest increase in its governance score of any other company in Canada's benchmark S&P/TSX index. In 2002, the company was near the bottom of the list with a mark of just 40 out of 100. Twelve months later, FirstService has vaulted to a solid mark of 69.
Indeed, two-thirds of companies on the S&P/TSX increased their corporate governance scores in 2003, and even more would have posted gains if ROB had not toughened its marking system this year. Among other big gainers this year were Alliance Atlantis Communications Inc., which climbed 27 points, and Metro Inc. and Fortis Inc., which each gained 25 points.
Fortis's mark improved in part because ROB no longer counted the company's retired CEO as a related director, because he has been independent from management for more than five years. The company also adopted new share ownership requirements for directors and bolstered its disclosure of information such as the amount paid to its auditor for other consulting work.
Among the changes at Metro, the company's CEO came off the compensation committee, the company adopted new mandatory share ownership requirements for directors and executives, and Metro abolished giving interest-free loans to executives.
At Alliance Atlantis, chairman and CEO Michael MacMillan says his entertainment company started its corporate governance reforms in 2001, when it reduced the size of its board to10 members from 20, and cut the number of members of management on the board to one from six.
But in 2002, the reforms went further. Alliance Atlantis was the lowest-ranked company on ROB's survey last year, in 270th position with 36 marks, and Mr. MacMillan said the company decided to adopt new practices and formalize some informal procedures. Its mark climbed to 63 points this year.
He said the company was in part guided by the new Sarbanes-Oxley Act introduced in the United States last year. But he said many changes were in the works before Sarbanes, and many went beyond legal requirements.
"With all the discussion about corporate governance in the past few years, it's encouraged us to review everything we do and see how we can improve," Mr. MacMillan said. "It's not just Sarbanes-Oxley. Even though we've taken [governance] seriously always, we thought we could do much better."
The company did not make further changes to its board composition, or remove any of the directors who have business relationships with the company, such as its lawyer and its investment banker. It also did not separate the roles of chairman and CEO, both held by Mr. MacMillan.
But the board appointed Anthony Griffiths as a lead director to chair meetings in Mr. MacMillan's absence. And it introduced new share ownership requirements for directors, stopped providing loans to its executives, and increased its disclosure of key information, such as auditor pay levels, the attendance records of directors, and directors' biographies. Alliance Atlantis also formally capped its option plan at 9.9 per cent of its shares outstanding to prevent future high dilution.
"Ultimately, options are dilutive. They really are an asset, and how much currency can you print on the printing press and give out to people? Having a cap forces us to take it seriously."
At FirstService, Mr. Hennick says reforms were also only partly spurred by corporate governance changes in the United States. Because it is listed on the Nasdaq Stock Market, FirstService was compelled to comply with some Sarbanes-Oxley changes such as requirements for a fully independent audit committee. But Mr. Hennick said FirstService wanted to do more than merely comply with rules.
"I said 'Let's go beyond,'." he recalls. "Whatever we can do, we'll do."
The board turned to one of its directors, David Beatty, to recommend reforms. Mr. Beatty, who is director of the Clarkson Centre for Business Ethics and Board Effectiveness at the University of Toronto, says he used ROB's rating system to prepare a lengthy list of proposals for change.
Mr. Beatty said some entrepreneurs and founders have been among the most reluctant to change their companies, but Mr. Hennick didn't hesitate to adopt new practices.
"I think the lesson is that with some dedication, and a commitment to improving things, it's something that can be done with alacrity," Mr. Beatty said.
FirstService now has a board with a majority of directors who are unrelated to management, as well as fully independent audit and compensation committees. The company has also set up a new nominating and corporate governance committee, and is preparing a new board assessment system.
Mr. Hennick remains chairman and CEO of the company, but FirstService also created the position of a lead director. Peter Cohen, CEO of real estate company Dawsco Group and former CEO of Centrefund Realty Corp., will chair meetings when Mr. Hennick is not present.
Mr. Hennick says he expects the company to go further soon and divide the chairman and CEO roles, but the board felt that a lead director was a good first step.
"One of the benefits is that I think we get more out of him [Mr. Cohen] because he has taken on a bigger role in the organization."
The other area of major reform was in compensation. The company introduced formal requirements that its directors own at least $120,000 worth of company stock and also abolished granting stock options to directors.
Mr. Hennick said direct share ownership by directors and management is critical at a company that has all its operating divisions co-owned by their managers.
"If you want to be a director, write a cheque [to buy shares]. We want partners around the table who have some money on the table."
The only reform that was not open for discussion, Mr. Hennick says, was abolishing the company's dual-class shares. FirstService has subordinate voting shares, each with one vote, and multiple voting shares, each with 20 votes. Mr. Hennick controls all the multiple voting shares, giving him 52.3 per cent of the total votes that can be cast by shareholders. He owns 9.8 per cent of the company's equity.
Mr. Hennick said his company needs a "firm hand on the tiller" to ensure that its strategy is not buffeted by the demands of short-term shareholders. Moreover, he says, the multiple voting shares protect the company from being taken over when its shares are undervalued.
"You can't operate at the whim of the shareholders all the time, because a shareholder may be there for a short time, and may have a view on your business that is a six-month or nine-month view."
Mr. Hennick says that as the company grows and issues more shares in the future, his voting control will slowly decrease.
Mr. Hennick says reforms aren't finished yet at FirstService. For example, he expects the role of chairman and CEO to be split at some point, and says the company will lower its stock option dilution and introduce a new formal director assessment system.
He added that after a year of changes, he doesn't understand why some companies have resisted corporate governance reforms.
"What's the big deal? Get a list of things, tell me what you can't do, and why. And if you can do all these things, just do them ... It's easier than people think. They're just making it hard."