February 24, 2003
The CPP Investment Board today released revised proxy voting guidelines that indicate how the Board is likely to vote on corporate governance issues regarding companies in which it owns shares on behalf of 16 million CPP contributors and beneficiaries.
The guidelines, posted on the web site www.cppib.ca, are designed to encourage companies to adopt policies and practices that enhance long-term shareholder value.
The guidelines oppose stock options, support directors and management receiving performance-based stock grants to be held during their tenure with the company, support all public companies having a majority of independent directors and oppose management sitting on board committees.
The CPP Investment Board is a long-term investor that is likely to own shares in many Canadian and foreign companies.
The guidelines describe stock options as problematic in many areas, including their effectiveness in aligning management and shareholder interests, the potential dilutive impact on existing shareholdings, their tendency to focus management on short-term performance, their use as a cash rather than ownership incentive, and intractable accounting issues.
“While many aspects of granting stock options could be improved, the result in our view would still be inferior to direct share ownership,” the guidelines state.
The CPP Investment Board supports a portion of annual director compensation being paid in shares at market value, companies establishing minimum share ownership for directors, and directors being required to hold such shares while on the board and for at least one year after leaving the board. The guidelines suggest director compensation at least equal to the per diem paid to the company’s senior professional advisors.
In the case of management, the guidelines support a portion of total compensation being paid in shares with executives required to own a minimum value of shares as a multiple of base salary while employed by the company.
The guidelines support all public companies, irrespective of size, having a majority of directors who are independent of management with no direct or indirect material relationship to the company other than director’s fees and shareholdings, so that “the individual’s judgment is not compromised by other loyalties in serving the best interests of all shareholders”.
Boards are encouraged to evaluate annually their effectiveness and that of each director and to develop a process for asking under-performing directors to step down, instead of relying only on “triggers”, such as age limits, a director changing principal occupation, poor meeting attendance, or term limits, as a catalyst for reviews or automatic retirement.
The guidelines support:
• An in-camera meeting without management and management directors present before or after every board and committee meetings to ensure candid discussion.
• Separation of the chair and chief executive officer as these positions have different responsibilities requiring different leaders.
• A formal annual board review of the CEO’s performance and compensation.
• All companies, irrespective of size, establishing audit, compensation and nominating or governance committees chaired by independent directors, with a majority of independent directors, and no management directors, as members.
The guidelines suggest that audit committees should consist solely of individuals with financial expertise or financial literacy; only the audit committee should hire and fire audit firms; and all audit, audit-related and non-audit fees paid to each audit firm should be disclosed in the company’s annual report. Furthermore, the chief executive and chief financial officers should certify the company’s quarterly and annual financial statements.
The CPP Investment Board is a Crown corporation created by an Act of Parliament in December 1997. It invests funds not needed by the Canada Pension Plan to pay current pensions in capital markets. Cash flows are currently invested in equities and real estate to balance the cash and bonds owned by the Canada Pension Plan. By increasing the long-term value of funds, the CPP Investment Board will help the Canada Pension Plan to keep its pension promise to Canadians. Based in Toronto, the CPP Investment Board is governed and managed independently of the Canada Pension Plan and at arm’s length from governments. Its fiscal year is from April 1 to March 31. For more information on the CPP Investment Board, visit www.cppib.ca.
For further information contact:
Ian Dale Vice-President – Communications and Stakeholder Relations 416-868-4086 idale@cppib.ca