Board Report Methodology

There are four elements to our annual governance survey: independence, accountability, total shareholder return and disclosure. Most of the information used in the survey is gathered from the company's annual management proxy circular distributed to shareholders in advance of the company's annual meeting. However, when company disclosure is wanting, secondary sources such as company annual reports, explanations of proxy voting records published by the Ontario Teachers Pension Plan as well as other independent sources are used.


The highest possible score in this category is 25 points, but companies could score as low as negative 19. In this category we look at the independence of the board, its committees and whether the company has a democratic share structure. We also attempt to measure just how independent the board acts by looking at some of its compensation practices.

Independence, as defined by Canadian Business, means the director has no business, personal or family connections to either the company or its senior management. The director should hold shares in the company, but the only compensation he or she should receive is the annual retainer awarded for acting as a director. For instance, a director who works at a bank or law firm employed by the company is considered a related director. A director who was employed by the company is considered “related” for three years after leaving the company.

1. Board Independence: Highest possible score: 8 points; lowest possible score: 0 points
Companies where at least two-thirds of the directors are considered independent are awarded the full 10 points. Five points are awarded to companies where between 51-65% of the board are independent directors. Two points are awarded to companies where only half the board is considered independent and no points are awarded to companies whose boards have less than a majority of independent directors.

2. Committee Independence: Highest possible score: 10 points; lowest: 0 points
Companies with no related directors on the audit, compensation or nominating committees receive the full 10 points. Three points are deducted for each related director on each committee. If the same related director appears on more than one committee, three points are deducted for each committee on which the director sits. Five points are deducted if company managers sit on either the audit or compensation committees.

3. Chair/CEO Split: Highest possible score: 5 points; lowest: 0 points
Companies that have split the roles of the Chairman of the Board and CEO receive the full 5 points. Companies that have split those roles but have appointed a director not considered independent are awarded two points. Boards that have not split the roles but appointed an independent “lead director” are also awarded two points. However, if that lead director is considered related, the company is awarded just one point. Boards where the roles of the Chairman and CEO have not been split and no lead director has been named are awarded no points.

4. Share Structure: Highest possible score 0 points; lowest: -10 points
Multiple-voting share structures give one class of shareholder more control than their equity ownership would normally allow. As a result, we penalize companies that use these dual-class share structures. Points are deducted on a sliding scale. Multiple-voting shares that represent more than 50% of the votes but less than 25% of the company's total equity are penalized 10 points; five points are deducted for companies where the voting shares represent more than 50% of the votes and between 25-49% of the company's equity. Two points are deducted for all other multiple voting share structures.

5. CEO Compensation: Highest possible score: 0 points; lowest: -9 points
Five points are deducted from companies that increased the overall CEO compensation despite a drop in its share price over the same period. Another four points are deducted for companies where the CEO was awarded between 24-49% of the total number of options granted that year. Two points are deducted if the board awarded the CEO more than 49% of the total options granted.

6. Director Meetings: Highest possible score: 2 points; lowest: -2 points
Two points are awarded if directors who are not members of management meet separately at every board meeting. One point is awarded if the independent directors meet, but the meetings do not take place at every board meeting. Two points are deducted if the proxy does not disclose any meetings of the board's independent directors.


The highest possible score for this section is 35 points but companies could score as low as negative 42 points. In this category we look at how accountable directors and managers are to shareholders as well as how well the board manages and evaluates its own performance.

1. Director Share Ownership: Highest possible score: 10 points; lowest: 0 points
Share ownership is the best way to align the interests of directors and managers with regular investors. We award the full 10 points to boards where ALL non-management directors who have been on the board for two years or more hold at least three-times the value of their annual retainer in company shares. We count actual shares as well as share-equivalents such as deferred share units. We do not count stock options. If all the directors are shareholders, but some fail to meet the three-year threshold, we award five points. No points are awarded if ANY director on the board for more than two years owns no shares.

2. Director and CEO Share Ownership Requirement: Highest possible score: 5 points: lowest: 0 points
Five points are awarded if both the directors and the CEO are required to own stock. Two points are awarded if either directors or the CEO (but not both) are required to own shares. Companies where the CEO is the founder of the company or is already a significant shareholder are awarded the full points without the ownership requirement.

3. Stock Options: Highest possible score: 0 points; lowest: -8 points
Granting stock options to directors can result in a conflict of interest for the board who are also supposed to ensure that option dilution is kept to a minimum. Companies that continue to pay directors with options are penalized. Three points are deducted if directors are granted options, but those options come from a director's option plan that restricts the number of options directors can grant themselves. Directors that draw their options from the general management option plan with no limits are penalized eight points.

4. Option Dilution: Highest possible score: 0 points; lowest: -10 points
One way to judge how well boards protect the interests of their shareholders is to look at how well the board has managed its stock option plan. The higher the dilution, the less value shareholders are getting from their investment. Fifteen points are deducted from companies with option dilution rates of more than 10%.

5. Option Re-pricing: Highest possible score: 0 points; lowest: -15 points
Stock options are meant to reward executives for their efforts to increase the value of the company's shares. When stocks go up, executives are rewarded with a potential stock option bonanza. Conversely, managers are penalized for a falling share price by holding options that become essentially worthless. Lowering the price of options is the equivalent of changing the rules halfway through the game. It shouldn't happen and 15 points are deducted from boards that engage in the practice.

6. Director Election: Highest possible score: 0 points; lowest -2 points
Boards that stagger the election terms of their directors (ie, only put a portion of the directors up for election every year) are penalized 2 points.

7. Director Evaluation: Highest possible score: 10 points; lowest: -5 points
How can a board expect to effectively evaluate the performance of company managers if it cannot evaluate itself? Boards that have implemented an annual, formal evaluation of both the performance of the board as a whole as well as its individual directors are awarded 10 points. Boards that do not look at the contributions of individual directors, but instead merely focus on the board as a whole are awarded eight points. Five points are awarded if disclosure of the type of evaluation is unclear, but some evaluation takes place. Boards with no evaluation and no corporate governance committee to oversee the effective management of the board are penalized five points.

8. Majority Voting: Highest possible score: 5 points; lowest: 0 points
Five points are awarded to boards that have adopted new “Majority voting” guidelines for director elections.


Highest possible score: 20 points; lowest: 0 points.

1. Does go well beyond basic disclosure of its governance practices? Does the proxy avoid legalistic language and boilerplate descriptions of its corporate governance? Rank the completeness, comprehensiveness and clarity of the proxy on a scale of one to five (five being the highest possible score).

2. Award one point for proxies that contain full biographies of the current directors including a list of other board appointments.

3. Does the company provide full “one number” disclosure of the total value of its executive pay package (including cash, bonus, the value of stocks, options and other equity awards as well as details of perks and the value of pension contributions). Award four points for full disclosure, less if the disclosure is incomplete or confusing.

4. Award two points if the company discloses the name of any compensation consultant hired by the board as well as the value of any work completed. Award only one point if only the name of the consultant is disclosed.

5. Award four points if the board has outlined a full list of performance metrics used to determine CEO compensation. To receive full points the company must provide a list of benchmarks or targets the company outlined and how the company performed against those targets. Partial points can be given if disclosure is incomplete or confusing.

6. Award two points for companies that consider the performance of peers or competitors in their compensation decisions.

7. If the company has a Supplemental Executive Retirement Plan (SERP), but neither the benefits of the plan, nor the financial obligations of the plan are disclosed deduct two points.

8. Award two points executive stock options are subject to performance hurdles or holding periods beyond the standard vesting schedules.

9. Deduct up to seven points for companies that have been the subject of a major accounting restatement, regulatory or criminal investigation or charges relating to its corporate governance. Points may also be deducted for outstanding loans to executives to buy stock or exercise options, excessive related-party transactions, excessive golden parachute awards or other obvious violations of basic good governance principles.

Share performance

Highest possible score: 20 points; lowest: 0 points
This is a controversial element in the Canadian Business governance methodology. Some complain that its inclusion helps companies with unusually good stock performance to hide their governance faults. Others complain that weak financial results are not necessarily the result of weak and ineffective boards. In fact, some of the best work by boards is done while a company is struggling to revive its financial fortunes.

We think the inclusion of share performance is essential. Companies that score near the top of our list have both strong governance structures as well as proven track record of financial performance. Most of the companies that score poorly have not only weak governance structures, but also lackluster performance. An often-troublesome combination.

We award full marks to companies whose total shareholder returns (from June 2004 to June 2007) have outperformed their peers on the TSX composite index over the past three years. During that period the TSX composite index increased by 29%. Companies whose own three-year TSR was between 1-30% higher are awarded 5 points; TSR that is between 30-60% higher are awarded 10 points; TSR that is 61-90% greater are awarded 15 points; companies with TSR of 91% or higher than the TSX were awarded 20 points.


The highest score a company can achieve is 100 points. The lowest possible score is -61.