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Saturday, Feb. 4, 2006

Why some companies scored poorly in ranking

By ELIZABETH CHURCH
Globe and Mail
Monday, Sep. 22, 2003

A lack of independent directors and limited disclosure of boardroom practices sets apart most companies that earned poor marks for corporate governance.

Of the 207 companies included in the latest Report on Business ranking of corporate boards, close to half of those receiving a grade of less than 50 had an executive on at least one board committee. As well, 18 of those 28 firms had one or more directors with a relationship to the company on a committee .

None of the companies in this group had a fully independent chairman and in nine cases the chairman was the chief executive officer of the company.

Paul Haggis, the recently appointed head of the Ontario Municipal Employees Retirement Board, said keeping executives off committees that set compensation or oversee auditors is just common sense. "These are very obvious things," he said.

Proposed changes to Canadian regulations will make it mandatory for most large Canadian companies to have a fully independent audit committee. In the United States, new rules under consideration for the New York Stock Exchange and Nasdaq Stock Market will require full independence of the nominating, corporate governance and audit committees for most firms.

At CoolBrands International Inc., the frozen treat maker known for its Eskimo Pie and Yogen Fruz brands that placed last in this year's ranking, co-chief executive officer Richard Smith sits on the firm's audit committee as well as the committee that oversees compensation. Those committees also include the firm's co-chairman Michael Serruya, an executive of the company. The only non-executive on these committees is independent businessman Romeo DeGasperis, vice-president of Con-Drain Co. Ltd. Mr. DeGasperis is also the only non-executive member of the firm's five-member board.

"We are a very entrepreneurial company that's been in the building phase of our business and we have put the highest priority in the way in which we've governed the company to ensure that we were aggressively pursuing our growth ," said president and co-chief executive officer David Stein.

"Our highest mission to our shareholders is to deliver to them a growing company that is as profitable as it can be and that they have financial statements that clearly illuminate what it is they are investing in."

CoolBrands also scored poorly for a variety of other reasons, including a dual-class share structure, and a highly dilutive option plan, even after it was reduced in response to shareholder concerns.

CoolBrands, which joined Canada's benchmark S&P /TSX composite index in the past year, was not part of last year's ranking, but more than half of the companies that scored below 50 in this latest study also placed there last year.

Changes to the listing requirements for the index mean that some of the companies that scored poorly in last year's study are no longer included in the index.

The marks of other companies in the bottom of our sample declined because of tougher marking standards in certain categories this year or the addition of new questions such as the one on executive compensation disclosure. Still others, such as Niko Resources Ltd., experienced changes in directors that reduced the independence of their board or identified directors as related for the first time.

Beverly Behan, a Canadian who specializes in corporate governance at Mercer Delta Consulting in New York, said while many firms have improved their boards, there are those which are not interested in the growing emphasis on corporate governance.

"You've got a lot of companies who are simply thumbing their nose at this thing and saying this too shall pass, and they're not making too many changes, or the changes they're making are the basic compliance stuff, and they never go any further," she said.

Companies that ranked near the bottom in the ROB study tended to have little to say in their proxy circulars about how their boards operate, and were sparing with details about the backgrounds and qualifications of their directors.

Just six companies in this group of 28 provided shareholders with biographical information on their directors and only four listed the other boards on which they sit. Three companies disclosed the attendance of their board members .

Patrick O'Callaghan, head of a Vancouver-based search firm, has studied board trends for several years. He predicts that disclosing such details will become common practice in the next five years given investors' increasing appetite for board accountability.

"I think shareholders want to know how many board meetings and how many committee meetings were held and I think they want to know who was at them. I think there is a responsibility for the board to fully disclose attendance at each meeting — what were our directors doing for us? "

At Winnipeg-based Investors Group Inc., senior vice-president and corporate council Terrence Wright said the company has felt no pressure to expand disclosure.

"We've shown good shareholder value over the years and the institutional community has not pressed us for any alternate disclosure than has been given in the past," he said.

Investors Group, which finished near the bottom in this year's study, includes a short statement on corporate governance in its annual report that provides the number of scheduled meetings for the coming year but does not give actual meeting numbers or attendance figures.

But others are making changes.

At Corus Entertainment Inc., chairwoman Heather Shaw said that in response to concerns, the board this year instituted an assessment process that includes board and director evaluation with the help of a consultant. "That is one example where we have tightened up what we are doing. It gives you better information," she said.

The Calgary-based company, which is currently drafting this year's circular, also plans to include several new disclosure features, such as director attendance, auditor pay, the frequency of board meetings and a list of related and independent directors, chief financial officer Tom Peddie said. The company also has introduced minimum shareholding requirements for its senior executives, he said.

Low levels of share ownership by directors is another common trait among these lower ranking firms.

Of the 28 firms with marks under 50, only four had minimum share ownership levels for directors — Rogers Communications Inc. and Rogers Wireless Communications Inc., Quebecor Inc. and Royal Group Technologies Ltd. As well, just five companies in this group had boards in which every director held at least 2,000 shares or $50,000 worth of stock in the company.

"Directors should be shareholders — I like to see mandatory ownership," said Mr. Haggis at OMERS. "If I have my own money in there, I prefer that directors have their own money in there."

Sheila Wagar, senior vice-president and general council at Winnipeg-based Great-West Lifeco Inc., explained that many of that firm's directors have chosen not to own shares because they represent policy holders at the company's insurance subsidiaries, although there is no rule preventing it. This year's circular lists six directors who own no Great-West shares.

Some form of reduced voting rights also were found at 14 of the companies in this group. Not one of them received full marks for their descriptions of executive compensation and a dozen received no marks in this category, meaning that they did not provide a clear explanation of how their top executive's pay was determined or the link between pay and performance.

The companies in this group also tended to make more use of options. Thirteen companies in the group had options outstanding or available that equalled more than 10 per cent of outstanding common shares. Nine had annual grant rates of more than 2 per cent and nine did not have a mandatory vesting period for options.

Mr. O'Callaghan, the Vancouver consultant, says structure alone will not make a good board, but is where you have to start. "You don't build a strong house with a weak structure. You really have to start at the beginning. I think that that's true with corporate governance."



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