Boards must look beyond the share price for CEO to navigate today’s challenges, report urges

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With shareholder demands and activism on the rise, a group of seasoned directors assembled by Canada’s main stock exchange and the Institute of Corporate directors has created a blueprint to help companies identify and mitigate risks.

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Two years in the making, the ICD-TMX Group’s recommendations are intended to prepare directors for the biggest challenges facing companies, including climate and technological change and geopolitical risk, in the same way the landmark Dey Report in 1994 laid out best practices for directors in the wake of a string of corporate scandals and failures.

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These days, boards are grappling with a range of new and sometimes competing risks from accusations of greenwashing and calls to divest carbon-producing assets to questions over doing business with countries such as China, due to its human rights record and escalating tensions with Taiwan.

“Canadian businesses now operate in an increasingly dynamic and digital world filled with new geopolitical, environmental and social challenges and rising expectations from a diverse group of stakeholders,” said Cheryl Graden, chief legal and enterprise corporate affairs officer at TMX Group Limited, and co-chair of the 13-member committee member that produced the new report titled Charting the Future of Canadian Governance.

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Welcome to the world of rising expectations

Rahul Bhardwaj, chief executive of the ICD

The recommendations in the report include changes to how directors do their jobs, including taking a larger role in assessing risks and evaluating strategy. They also urge boards to reconsider how they select executive leadership and measure performance beyond the “narrow confines” of share price.

“While Canada has a strong track record in corporate governance, the status quo for boards in this country is not an option,” the report said.

Rahul Bhardwaj, chief executive of the ICD and co-chair of the committee behind the report, said recent news that Apple Inc. plans to move some iPhone production out of China goes to the heart of the report’s recommendations to boards to better manage business risks and consider multiple stakeholders to avoid costly outcomes down the road.

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“Welcome to the world of rising expectations,” he said, noting that there is pressure on the tech company’s board to simultaneously deal with longstanding geopolitical risks and more recent supply chain issues.

That type of complexity is not unique in today’s business world, Bhardwaj said.

“Boards are looking for some principles to help them guide them through this uncertainty. That’s exactly what this report is aimed at.”

Among the recommendations, in what might signal a major overhaul for some companies, directors are urged to recognize that environmental, social and governance matters cannot be regarded as separate from a company’s strategy. The report also calls for board oversight of climate change initiatives to determine whether the management has clearly identified ESG issues relevant to the company’s financial and competitive positioning, and those that are important to stakeholders.

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A director’s job should also include identifying and recruiting “a new kind of chief executive who is better equipped to drive change across the broadest possible front, given the increasing complexity that surrounds business,” the report says, adding that healthy corporate culture and diversity are crucial for identifying risks and opportunities in this era.

More than ever, the report says, there is an imperative to align all stakeholders’ interests for the long term.

“I don’t think you can look at share price to determine whether you’ve got a successful CEO in the environment we’re going into,” said Bhardwaj, acknowledging that it remains an accepted metric within many companies, and one that compensation is often based on, at least in part.

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“It’s just far more nuanced, it’s far more complex, and the requirements of a CEO are going to be ones that can’t just be solely focused on enhancing shareholder value,” he said.

Recommendations aimed at considering a variety of stakeholders beyond simply shareholders are in keeping with Canadian court decisions since the Dey Report. The updated corporate governance framework goes further, saying it is imperative that directors reflect on the diversity of both the company’s stakeholders and the communities in which it operates.

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More than 25 years ago, the Dey Report to the Toronto Stock Exchange helped spur acceptance of new practices to improve oversight of management decisions that are now widely embraced by public companies, such as having a majority of independent directors and separating the roles of chairman and chief executive.

Graden and Bhardwaj said it is difficult to predict what will become accepted practice in corporate Canada in the next quarter century, but they both expect that board responsibilities will continue to evolve beyond simple compliance oversight to include a larger and earlier role in setting strategy and overseeing the culture within companies.

“The committee’s report is a critical resource for directors … one that is intended to guide an important discussion around the necessary evolution of Canadian corporate governance in a complex, rapid-fire, multi-stakeholder world,” Graden said.

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