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Saturday, Feb. 4, 2006

Directors' share ownership a divided issue

Globe and Mail
Thursday, Sep. 25, 2003

Toronto precious metals company Gabriel Resources Ltd. disclosed in its latest shareholder proxy circular that no one on its board of directors owned any shares in the company as of last May, including the company's new chairman and chief executive officer, Oyvind Hushovd.

That included not only the four new directors who stood for election at the company's June annual meeting, but also two directors who joined the Gabriel board in 1997 and 1998, and another who joined 16 months earlier in January, 2002.

And Gabriel Resources is not alone. Canada has many publicly traded companies with poor track records of share ownership by their directors, although their numbers are falling as more companies adopt policies requiring share ownership by their board members.

Report on Business examined director share ownership in Canada as part of a study of corporate governance practices of 207 companies listed on the benchmark S&P/TSX index. The study looked at the last annual proxy circular published by each company, and examined how many directors on Canada's major boards own shares in their companies.

The review found that 49 per cent of firms said all of their directors owned at least 2,000 shares.

The other 51 per cent reported declining levels of director share ownership, with 13 per cent of companies reporting that three or more directors on their boards had low or no share ownership.

The review excluded directors who were standing for election for the first time, in order to give new directors some time to acquire shares after their appointments. Indeed, the ROB review gave directors two years on the board to reach a target of 2,000 shares or $50,000 worth of stock.

The study also found that 58 per cent of companies in the index do not have a mandatory share ownership requirement for their directors, while 42 per cent said directors are required to own shares. Unsurprisingly, more companies with ownership requirements reported high levels of stock ownership by their directors.

Because the ROB review took its data from companies' last published proxy circulars, ownership information for directors may have changed since then as they bought or sold shares.

U.S. corporate director Charles Elson, head of the University of Delaware business school's Weinberg Center for Corporate Governance, says having independent directors on a board isn't good enough if they don't also own shares to motivate them to take their work seriously.

"It should be enough that if you lose it, you throw up," Mr. Elson told corporate directors at a recent conference in Toronto. "It has to be enough to you that you're going to actively monitor it. If it's too little, you won't care."

Claude Lamoureux, chief executive officer of the Ontario Teachers Pension Plan Board, said share ownership by directors is crucial to ensure they are aligned with shareholders.

"If you represent the share owners, I think you should own shares yourself," Mr. Lamoureux said. "It makes you think like a share owner. I go by common sense. You'll care a lot more if you own something."

The Canadian Coalition for Good Governance, which represents 23 of Canada's largest institutional shareholders in Canada, has included share ownership requirements for directors as one of its recommended corporate governance standards for Canadian companies.

The CCGG recommends directors should be required to own shares worth a minimum of three times their annual retainer in shares. And it says best practice is to require five times the retainer in shares.

David Beatty, managing director of the CCGG, says directors with shares are likely to push a little harder when they are worried about something the company is doing.

"I think it gives us a level of comfort that, at the end of the day when that person is in the boardroom, he or she is talking from the same perspective as us, even though the shareholdings are going to be significantly less than ours," Mr. Beatty said.

"And I think behaviourally at the margin, that might just encourage you to ask that extra question, dig a little deeper and protect you a little more from that 'groupthink' phenomenon of saying, 'Well, if [another director] has thought about this and is happy, I will go away and stop asking questions.' "

Some companies have adopted high share ownership requirements for their directors. BCE Inc., for example, has raised its ownership requirement for directors to 10,000 shares within five years, which is worth about $300,000 at current share prices. BCE chairman Richard Currie spent $26-million last year to buy one million shares of the company.

Sun Life Financial Inc. now requires its directors to own shares worth six times their annual retainer. The insurer's new chairman, William Stinson, held 21,429 shares when the last proxy circular was issued, worth about $652,000 today.

At Moore Wallace Inc., formerly known as Moore Corp., outside directors must receive all of their board fees in share units, which must be held as long as the directors remain on the board. But the company makes this requirement voluntary for any directors who work in the public sector, such as government, educational or non-profit organizations. This exemption would apply, for example, to Moore director Ron Daniels, who is dean of the Faculty of Law at the University of Toronto.

Royal Bank of Canada does not make an exemption for public sector employees, but says its directors can meet the bank's requirement to own $300,000 worth of RBC stock. That's because directors have five years after joining the board to reach this level, and can receive their annual board fees in share units to help them reach the target.

RBC chairman Guy Saint-Pierre said the bank didn't want to create an ownership requirement that would allow only millionaires to sit on the board. But he said the five-year time limit and the ability to receive share units as payment will make it a realistic target.

When the bank's last proxy circular was issued, Mr. Saint-Pierre owned more than 43,000 RBC shares and share units, worth about $2.6-million at the current share price. Mr. Saint-Pierre said that when directors own a significant number of shares, they better understand the consequences of their decisions

"They know more what it means to increase dividends or reduce dividends, to not have a profit, or to see the share price go down 40 per cent or 50 per cent."

Mr. Saint-Pierre said share ownership by directors is something he considers critical for his own investments.

"I'm an investor in many companies, and there's nothing I hate more than when I receive a management proxy circular and I'm invited to vote for even one of my friends . . . if that man has 100 shares in the company and he has been a director for 14 years," Mr. Saint-Pierre said. "I usually vote against him, because I don't think I can trust him. He just has not put enough on the line to really know what shareholder interest means."

FirstService Corp. requires all of its directors to own $120,000 worth of shares, excluding stock options. Chairman Jay Hennick says all of the company's directors well exceed that minimum target.

"And they all increased their position after the requirement was brought in. We want partners around the table who have some money on the table," Mr. Hennick said.

At the other extreme, a significant number of companies have boards with low levels of share ownership.

Astral Media Inc.'s last proxy circular showed that four directors owned no shares, including chairman André Bureau. Director Mila Mulroney also owned no shares, nor did director Serge Gouin, who is vice-chairman of Salomon Smith Barney Canada. Director George Cohon, founder and senior chairman of McDonald's Restaurants of Canada Ltd., owned 1,000 shares of Astral. Paul Godfrey, CEO of the Toronto Blue Jays had 2,000 shares.

According to the last proxy circular from CanWest Global Communications Corp., the only directors who owned large numbers of shares in the company were members of the Asper family. Lloyd Barber, on the board since 1992, had no shares, nor did Conrad Black or David Radler. The other two outside directors held 2,225 shares and 2,000 shares respectively.

At Hummingbird Ltd., four of the company's six directors -- including all three independent directors -- owned no shares at the time the last proxy circular was issued, including John McLennan, who is CEO of Allstream Inc., formerly AT&T Canada. Hummingbird chief financial officer Inder Duggal, who is a director, also owned no shares.

Similarly, most of the directors of St. Lawrence Cement Group Inc. owned no shares when the last proxy circular was issued, including former Ontario premier Bill Davis, former Quebec premier Pierre Marc Johnson, and Hugh Segal, former chief of staff for former prime minister Brian Mulroney.

Agnico-Eagle Mines Ltd. reported in its proxy circular that company chairman James Nasso owned no shares. He joined the board in 1986.

Open Text Corp. disclosed that two of its long-serving directors had no shares, while president John Shackleton owned just 1,693 shares.

Indeed, a number of companies disclosed low share ownership by their senior executives, including their CEOs. For example, Rogers Wireless Communications Inc. reported in its most recent proxy circular that, as of April 1, CEO Nadir Mohamed owned no shares in his company. Mr. Mohamed joined the company in August, 2000, and became CEO in July, 2001.

International Forest Products Ltd. reported that its CEO, Duncan Davies, owned 3,500 as of March 1. Mr. Davies has been CEO since February, 2000.

Some companies have encouraged higher share ownership by their top executives by introducing mandatory ownership requirements for senior employees.

For example, MacDonald Dettwiler and Associates Ltd. said CEO Daniel Friedmann held 10,827 shares as of March 31. But the company said it has introduced a new share ownership guideline for its CEO, recommending ownership of three times his salary, and encouraging ownership of five times his salary.

The Globe review examined CEO share ownership, and found that 51 per cent of companies say they have a mandatory share ownership requirement for their CEO. That total also includes closely held companies whose CEO is the controlling shareholder, because such companies would be unlikely to see a need for a mandatory CEO ownership requirement.

The CCGG governance guidelines recommend that companies require their senior executives to own shares as long as they remain in their jobs, but the coalition does not recommend specific dollar amounts of shares that should be held.

Mr. Beatty says he is a fan of mandatory ownership requirements, even when companies argue that a formal standard is unnecessary, because they send a clear message -- especially to new directors -- that share ownership is extremely important at the company. He said it communicates a clear sense of the board's culture.

"It says what the expectation is, that we want our directors to be shareholders. And we want them to have a significant shareholding, somehow defined," Mr. Beatty said.

At Investors Group Inc., the mutual fund company said eight of its board members owned 1,100 shares or less at the time of its last shareholder proxy circular.


What kind of a financial stake should a director have of a company? It depends on the firm - not all have share ownership requirements.



BCE Inc. chairman owns 1.03 million shares


Sun Life Financial Inc. chairman owns 21,429 shares



Gabriel Resources Ltd. Chairman doesn't own any shares


Astral Media Inc. chairman doesn't own any shares


The Canadian Coalition for Good Governance recommends that directors be required to own shares worth a minimum of three times their annual retainer in shares. And it says best practice is to require five times the retainer in shares. As part of its review of director and chief executive officer share ownership declared in proxy circulars by 207 companies in the TSX/S&P index, this is what Report on Business found.

58% of the companies do not have mandatory share ownership requirements for directors;

49% have directors who own more than 2,000 shares;

8 of the directors in Investors Group Inc. own 1,100 shares or less;

$300,000 is the value of shares each Royal Bank of Canada director must own;

0 is the number of shares owned by the three independent directors of Hummingbird Ltd.;

$120,000 is the value of shares each FirstService Corp. director must own.



TransAlta, Royal Bank on top

Governance report card

FirstService Corp. moves up


Compensation disclosure


Options debate rages on

Board independence


The gender gap hasn't closed

Dual classes still prevail


The gender gap hasn't closed

Regional blocks remain intact


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