On November 19, 2010 the Canadian Securities Administrators (CSA) published a request for comments regarding proposed amendments (Proposed Amendments) to Form 51-102F6 Statement of Executive Compensation (in respect of financial years ending on or after December 31, 2008) (Form). The comment period is open until February 17, 2011.
The objective of the Proposed Amendments is to improve the disclosure shareholders receive regarding executive compensation and corporate governance by addressing the issues raised in CSA Staff Notice 51-331 Report on Staff's Review of Executive Compensation Disclosure, which in November 2009 reported the findings of a CSA review of 70 reporting issuers' compliance with the Form. In addition, certain of the Proposed Amendments are proposed in light of rules regarding executive compensation disclosure adopted in December 2009 by the United States Securities and Exchange Commission (SEC Amendments).
Below is a description of certain of the Proposed Amendments. A complete description is available on the Ontario Securities Commission's website (PDF).
The most significant of the Proposed Amendments is the broadening of the Form's compensation discussion and analysis (CD&A) section to require disclosure regarding the risks involved with a company's compensation policies. The SEC Amendments introduced a similar requirement due to fears that short-term incentives in companies' compensation policies are not always aligned with those companies' respective long-term interests.
The Proposed Amendments would require a company to disclose whether its directors considered the implications of risks associated with their compensation policies and if so, to also disclose:
- the extent and nature of the directors' role in risk oversight of the company's compensation policies and practices;
- any practices used to identify and mitigate compensation policies and practices that could potentially encourage inappropriate risk-taking (the Proposed Amendments include examples of such policies or practices); and
- any identified risks arising from compensation policies and practices reasonably likely to have a material adverse effect on the company.
The Proposed Amendments would also broaden the CD&A section of the Form to require disclosure regarding any consultants engaged by the board of directors or its compensation committee to assist in determining compensation paid to directors or executive officers. The SEC Amendments introduced a similar requirement in response to fears that consultants might be influenced in recommending compensation packages in situations where the consultant is also providing services to the company itself, such as human resource, actuarial or benefit administration services.
The Proposed Amendments would incorporate certain disclosure currently required by Forms 58-101F1 and 58-101F2 of the CSA into the Form, and would also require additional disclosure regarding:
- the company's compensation committee, including the committee's composition, skills, experience and mandate; and
- any compensation consultants retained during the course of the applicable financial year, including the consultant's mandate, and if the consultant was retained to provide both executive compensation services and other services, the nature of those other services, the process undertaken to approve such other services and the fees paid in respect of such other services.
Hedging by NEOs
A further proposed change to the CD&A section is to require disclosure as to whether a company's named executive officers or its directors are permitted to purchase financial instruments designed to offset a decrease in the market value of the company's equity securities.
"Serious Prejudice" Exemption
The Proposed Amendments would also clarify the exemption in the CD&A section from disclosing company-specific performance goals on the basis that such disclosure would "seriously prejudice the interests" of the company. The Proposed Amendments would require a company to specifically state that it is relying on that exemption, to explain why disclosing the relevant performance goals would be seriously prejudicial to its interests and would clarify that the exemption is not available where the performance goal is based on broad corporate-level financial performance metrics such as earnings per share, revenue growth or EBITDA.
Valuation of Equity and Option Grants
The Form currently requires a company to reconcile any difference between the grant date fair value of share- and option-based compensation reported and the accounting fair value of such compensation. In addition, where such a difference exists, a company is required to explain the methodology used to calculate the grant date fair value and describe any key assumptions and estimates used and the reason the company chose that method. The Proposed Amendments would require a company to include such reconciliation and explanations in all cases, regardless of whether the grant date fair value is different from the accounting fair value.
The Form currently requires a company to disclose non-compensatory amounts contributed to defined contribution plans, including employee contributions and regular investment earnings. Since the Form has come into force the CSA have received several inquiries questioning the relevance of including such non-compensatory amounts. In light of this, the CSA are requesting comments from market participants regarding the value of such disclosure and, depending on the comments received, may eliminate the requirement to include it.
The Proposed Amendments would also result in non-substantive consequential amendments to National Instrument 51-102 Continuous Disclosure Obligations, Form 58-101F1 Corporate Governance Disclosure and Form 58-101F2 Disclosure of Corporate Governance Practices.
It is proposed that the Proposed Amendments would come into force for financial years ending on or after October 31, 2011. Accordingly, in addition to providing any comments they may have, companies should take note of the comments submitted to the CSA and the CSA's response and plan their upcoming disclosure accordingly.