A replay of the webinar is available here.
Every year, CCGG engages with the boards of approximately 30 to 35 of Canada’s leading public companies on behalf of Members (institutional investors). The discussion is focused on governance matters that are of primary importance to investors. Over the last few engagement seasons, one of the most prominent topics covered during our engagement meetings has been senior management (executive) share ownership. This increased focus is primarily a result of our observation that several share (equity) ownership policies allow senior management to receive credit for unvested, share-based awards (restricted stock units and performance stock units) for the purposes of satisfying the company’s ownership requirements. Giving value to equity-linked investments that management has not yet earned results in an exaggeration of the officer’s ownership stake in the company. In many cases, these awards are settled in cash at maturity; thereby limiting the time horizon of the officer’s exposure to share price movements. When such unvested awards are relied upon to meet share ownership requirements, the link between management and shareholder interests is weakened.
Following the publication of a research report on management common share ownership, CCGG invited CEOs of two leading institutional investors (TD Asset Management and Jarislowsky Fraser) to discuss their views on the subject during a webinar event held on March 1, 2023.
Key issues discussed at the event and in our research report include the following:
- Almost 90% of Composite Index constituents have a formal share ownership policy and about 70% of these constituents allow management teams to satisfy share ownership requirements through unvested compensation awards. As such, senior officers (CEOs, CFOs, COOs, and heads of key business divisions often referred to as named executive officers) often do not hold a meaningful common share interest in the companies they run relative to their total compensation.
- This can be linked to the fact that a meaningful portion (if not all) senior officer direct compensation, including base salary, bonus, and often restricted and performance share units, is settled in cash as opposed to common shares. As well, most share ownership policies do not explicitly require officers of the company to hold common shares so long as they hold a sufficient number of unvested restricted stock units (RSUs) or performance stock units (PSUs), collectively referred to as unvested compensation awards.
- CEO common share ownership requirements are not onerous when compared to total compensation and typical CEO tenure at the company, on average, within the Composite Index is approximately 15 years with the company and 9 years in the CEO role. Despite this, a good number of CEOs in the Composite Index do not hold enough common shares to meet their respective company’s share ownership policy. Furthermore, compliance with share ownership policies through direct share ownership is even less common for named executive officers i.e., roles that often report to the CEO. Share ownership requirements and CEO common share ownership also vary based on sector.
- Investors have high regard for a CEO or senior manager who invests his or her hard-earned cash into common shares of the business they manage; CEOs who “eat their own cooking” set the right tone from the top and encourage others within their organization to also own sizable economic interests. Furthermore, panelists noted that, in their experience, companies with a culture of share ownership and where senior management hold a meaningful common share interest tend to outperform. Moreover, panelists added that, in their experience, directors with greater common share ownership are typically more interested and involved in overseeing the business.
- RSUs, PSUs and other forms of compensation awards serve an important purpose, but holding these awards, in lieu of direct common share ownership, does not convey the same high-conviction belief in the long-term future of the company on the part of the senior management team. Out of all compensation instruments that are currently used in the Canadian market, DSUs which must be held until retirement, are best at aligning management interests with those of long-term shareholders. However, DSUs, like other deferred compensation awards on which income taxes are deferred, represent a less meaningful economic interest relative to an economic interest that is held in common shares, all else equal.
- Panelists also discussed a range of recommendations, covered in CCGG’s recently issued report, for boards of directors to consider in order to strengthen management alignment with shareholders.
Download the full research report here.