Leadership and Governance

Board Governance Practices Hard Pressed to Keep Up With Increased Director Responsibilities

Karla Thorpe, Associate Director, Compensation and Industrial Relations Research, Leadership and Human Resources

December 7, 2009

New and evolving governance standards are changing the role of corporate directors. At the same time, the economic slowdown has triggered a greater level of board involvement in areas such as corporate strategy and executive compensation. Yet, as the demands on boards of directors increase, few publicly traded Canadian companies have governance practices that meet a “high” standard, according to the Conference Board’s 18th survey on board compensation and practices. Canadian Directorship Practices 2009: Compensation and Governance Practices of Boards of Directors of Publicly Traded Firms in Canada, is based on the responses of 130 companies that are traded on Canadian stock exchanges.

Boards Become More Involved

Most responding firms have updated their board practices in the last two years—only 15 per cent have not made changes since 2006. Boards are most active in revising financial strategies to take into account new market conditions (72 per cent), reviewing the long-term sustainability of the company’s operations (63 per cent), and validating assumptions about the current view of the market (57 per cent).

Companies exhibit the strongest governance practices in the area of empowerment and accountability.

The areas where the majority of boards indicate they play a substantive role include:

reviewing the executive compensation philosophy
developing corporate strategy with management
assessing management’s success in meeting its objectives

In these areas, board members often challenge management initiatives and generate new ideas for the executive team to consider.

Boards are the least active in the areas of:

promoting a culture of innovation and change
promoting corporate social responsibility
promoting environmental sustainability

About a third of responding companies indicate that their board plays only a minimal role—mostly reviewing information on the organization’s initiatives provided by management.

Governance Practices Fall Short of High Standard

The Conference Board’s Governance Index—which assessed 60 of the 130 responding organizations—found that only 20 per cent of them have “high” governance practices. Forty-five per cent of these 60 firms have governance practices that can be described as “moderate” and 35 per cent have “developing” governance practices.

Companies exhibit the strongest governance practices in the area of empowerment and accountability, while practices in the areas of continuous learning and growth are the least developed. One in five directors has served on a board for less than two years. Only 2 per cent of firms require formal certification (such as The Directors College). Only half of companies have a formal orientation program in place for new directors and less than two-thirds (63 per cent) actively promote ongoing director education.

¹The Governance Index is based upon The Conference Board of Canada’s principle-based governance model, which recognizes both the “technical and structural” (rules-based) and the “cultural” (principle-based and behavioural) sides of directorship. The index includes a set of 30 good governance practices that fall under six broad dimensions: leadership and stewardship, empowerment and accountability, communication and transparency, service and fairness, accomplishment and measurement, and continuous learning and growth. A composite governance index score (ranging from a low of 0 to a high of 100) was calculated for each responding organization by averaging their responses. Only organizations that responded to all 30 questions were included in the analysis (a total of 60 of the 130 respondents). Organizations scoring under 50 on the index have governance practices that are still “developing.” Those scoring between 50 and 75 are considered to have “moderate” governance practices, while those scoring between 75 and 100 are considered to have “high” governance practices.