Companies have made significant shifts in the makeup of boards and their key committees, appointing a far greater number of independent directors, the Report on Business review shows. Boards are also embracing more procedures designed to boost independent action by directors -- for example, an increasing number of boards say they regularly hold private meetings of independent directors with no management present.
"What you are seeing is the slow adopters catching up," said Arthur Sawchuk, chairman of Manulife Financial Corp. He said that, now that most companies have implemented reforms, it is time for boards to move beyond establishing safeguards to focus on growth.
For the second time in three years, Manulife finished in top spot in the Report on Business rankings of governance practices among companies on the S&P/TSX composite index. Manulife scored 95 out of 100 in the latest survey, after tying for first in 2002.
There was a three-way tie for second place, with Bank of Montreal, Finning International Inc. and Suncor Energy Inc. all scoring 94.
David Beatty, an independent director on the board of Bank of Montreal and managing director of the Canadian Coalition for Good Governance, says there have been broad improvements to governance in recent years as unfolding scandals have made directors keenly aware of the consequences of weak standards.
"It's definitely moving to the good over the last three years," he said in an interview. "I feel I'm running down the hill behind the stone, with my hand keeping it rolling to make sure it's going. . . . In Corporate Canada, the larger corporations are very much seized with the issue of governance."
The Report on Business review found that only 7 per cent of companies in Canada's benchmark S&P/TSX index still do not have a majority of independent directors on their boards, down from 21 per cent in 2002, when Report on Business first conducted its landmark research. And a full 59 per cent have boards with more than two-thirds of their directors entirely independent from management, up from 43 per cent two years ago. (The statistics are from only the 183 companies that have been in the index for each of the past three years.)
Major missteps not only spark visits from investor groups, companies have found, but also multiple shareholder lawsuits, and a sharp selloff of shares.
Bill Mackenzie, president of shareholder activist Fairvest Corp., says shareholders are sending their most direct signal to companies through their proxy votes. Major institutional investors now routinely withhold their votes for directors who are not independent, especially if they sit on the critical audit and compensation committees.
"Certainly we've recommended against a number of directors at numerous companies on the basis of independence," he said.
In response, companies have been moving quickly to reformulate their boards to reassure investors that directors' interests are fully aligned with those of shareholders rather than management.
Among the striking changes, the Report on Business data show that 86 per cent of companies now have fully independent audit committees containing no members of management or related directors, compared with 56 per cent in 2002.
Also in 2004, almost 65 per cent of companies had independent compensation committees to review executive pay, up from 42 per cent in 2002.
And more companies have also appointed a fully independent chairperson to oversee boards, continuing to move away from combining the chair and chief executive officer positions. In 2004, 77 per cent of S&P/TSX index companies had split the roles, up from 70 per cent in 2002.
Even more significantly, companies splitting the two roles are appointing chairpersons who are not members of management or otherwise related to the company. In 2004, 44 per cent of companies have fully independent chairpersons, up from 34 per cent in 2002.
Some of the independence changes to boards have been forced on companies by new regulations, especially in the United States. The Sarbanes-Oxley Act, passed in 2002, requires companies to have fully independent audit committees, while New York Stock Exchange listing rules now require companies to have independent compensation and nominating committees, as well as a majority of independent directors.