Governance at a discount: The gap between public and private board compensation – Canadian Government Executive

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May 7, 2012

Governance at a discount: The gap between public and private board compensation

Stakeholders and media are currently focusing substantial attention on executive compensation. However, by focusing solely on top executives, they are only capturing half of the story.

We often hear about issues pertaining to CEOs, presidents and other senior executives. But what about the group of individuals chosen to oversee these executives and to positively represent stakeholder interests? Shouldn’t organizations do their best to attract and retain highly skilled and experienced people to serve in these oversight positions?

Global Governance Advisors conducted a study, “Board Compensation and Federal Crown Corporation Competitiveness,” that highlighted a gap between federal Crown corporations and two specific sectors within the Canadian economy. The study discovered that the federal government and Canadian taxpayers are currently receiving governance services for a fraction of what most private sector corporations are paying.

Crown corporations are normally created to meet ongoing public policy objectives where there is a need for both a clear separation of the government from day-to-day management activities and the use of sound commercial business practices. Typically there is a strong, commercially viable business case that drives the creation of these arms’ length organizations. As cost-neutral or revenue-generating entities, operational freedoms such as control over human resources and compensation are not only granted but also deemed necessary.

However, if these organizations are expected to operate within the Canadian market and operate as viable business entities, they must attract and retain individuals who are experienced and capable of governing. Through their omission from general surveys, however, these organizations will never know if they are competing at market levels.

The issue

The need for strong board governance is universal. Under today’s economic strains, stakeholders, whether citizens or governments, are placing greater demands on organizations and their board members. Adequate board leadership is essential to corporate health. However, the current environment has increased competition between organizations interested in attracting and retaining individuals with appropriate governance knowledge, experience and skill. At the same time, demands on quasi-public organizations to perform for the public good pressure them to compete with private sector organizations for individuals of similar calibre.

Given this heightened need for talent, it is fair to assume that top board prospects within the Canadian economy receive multiple directorship offers, further escalating the competition for top governance talent throughout the country.

Although it is not the only driver of job acceptance and satisfaction, competitive compensation is a key component that organizations should be aware of. Organizations that intend to stay competitive for talent need to be assured that they are adequately compensating their board members and this can only be done through the use of comparable market compensation information.

Unfortunately, for some time now the federal government has failed to keep up with current market levels. As a result many of the larger board compensation surveys have decided to exclude Crown corporations from their analyses. Since the leadership skills required to govern these large, complex organizations does not differ, the exclusion of quasi-public organizations is a serious omission. Stakeholders need to know that the organizations they have invested in are being competitive in their governance practices. For example, both Canada Post and UPS compete in a highly competitive industry, not only for market share, but also for board and executive talent. If approached to sit on either board, remuneration would certainly play a role in any individual’s choice.

The analysis

To illustrate the competitiveness of remuneration levels, the board compensation survey evaluated how federal Crown corporations currently compare within two Canadian economic sectors. The study included 48 federal Crowns as well as 100 publicly traded organizations in both the financial and mining sectors – sectors that are highly regulated and are currently experiencing strong levels of turnover.

Overall, the study was intentionally limited to provide a snapshot of how well Crown corporations compare; it was not intended as an all-inconclusive study for the entire Canadian economy.

In the analysis, organizations were broken down into groups based on their total assets as well as annual revenue (or in-kind revenue) levels. The results were not surprising but, as taxpayers and governance practitioners, we found the disparity somewhat alarming.

How Crowns measured up

The results of the study show that the 2009 board member compensation was below the 10th percentile and, in some cases, at the very bottom when compared to publicly traded companies of equal size within the mining and financial services sector. Though this comparison was limited to two sectors, to be at or near the bottom in all instances is a clear indication that the government is questionably focused on paying discounted compensation rates instead of attracting people who are proven leaders and have valuable experience governing organizations that generate strong profits.

Regardless of the private sector peer group, Crown corporation board remuneration was well below the for-profit levels. Our study does not advocate that compensation levels be equal, but it does suggest that they be brought within a reasonably competitive range.

Unfortunately, the current levels do not justify the current skill level, liability and dedication Crown board members provide. Given the current demand for strong board leadership, if the government remains uncompetitive, Canadians will run the risk of not attracting or retaining the talent we need to maintain strong Crown corporations.

 

Brad Kelly is a director with Global Governance Advisors (brad.kelly@ggovernanceadvisors.com). The full report can be accessed at www.ggovernanceadvisors.com/media_academic.htm

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