A Proxy Disclosure Analysis

-Evaluating Blackberry Ltd. Fiscal 2014 Management Proxy Circular

Submitted by Ying Chen (Roxy)

Student Number: 21333495
Date: August 2015

TABLE

OF

CONTENT

EXECUTIVE SUMMARY 4
EXECUTIVE COMPENSATION 5
QUALITATIVE ANALYSIS 5
Executive Compensation Philosophy

Peer Group Benchmarking Practices

Structure of Executive Compensation

10

QUANTITATIVE ANALYSIS

19

Relative Degree of Alignment (RDA)

Multiple of Median (MOM)

23

Pay-TSR Alignment (PTA)

24

DIRECTOR COMPENSATION
QUALITATIVE ANALYSIS

19

26
26

Boards Compensation Philosophy

26

Director Compensation Structure

26

Share Ownership Guidelines

QUANTITATIVE ANALYSIS

28
28

Compare Blackberrys Director Retainers and Meeting fees with its peers 28
Compare the Average Amount of an Individual Director of Blackberry might made in aggregation
with that amount of its peers

29

GENERAL GOVERNANCE ISSUES

DIRECTOR ATTENDANCE

32

32

MAJORITY VOTING

33

BOARD STRUCTURE

33

Board Size

33

Skill Matrices 34
Director Independence 35
Independence of Board Chair

35

Board Committees Independence

Director Interlocks

35

36

Board Diversity 36
DIRECTOR EVALUATION

37

SHAREHOLDER ENGAGEMENT
Say on Pay Policy

37

38

PROXY ADVISORY FIRM COMMENTS 38

SAY ON PAY VOTING RESULTS 39
BLACKBERRYs RED FLAGS AND GREEN FLAGS REGARDING ITS GOVERNANCE
PRACETICES

40

REFERANCES

41

APPENDIX 42

EXECUTIVE

SUMMARY

Why should one care about the proxy disclosure of governance practices? The bottom line, after
many years of debate and study, is that good corporate governance benefits companies, investors
and markets. Corporate governance stands for responsible business management geared towards
long-term value creation.
Proxy disclosure is important because reporting is widely viewed as the most effective tool that
regulators have to encourage better corporate governance. Reporting puts information in the
hands of the markets. And markets and investors make investment decisions based on this
information. Good information helps the markets ascertain the degree to which companies
respond to shareholder needs; it reveals risks, and shows the quality of future cash flows.
This report will provide a detailed observation of Blackberry Limited Fiscal 2014 Proxy Circular
from a shareholders perspective. The Blackberry Fiscal 2014 proxy circular is selected because
2014 is a critical transitional year for Blackberry: the company experienced debenture financing
in 2013 resulted in an ongoing reorganization of the company including significant management
and board changes in 2014. The executive compensation programs and related corporate
governance policies disclosed in Blackberrys 2014 proxy, reference to practices of its five most
relevance peers: Google, Cisco Systems Inc., Motorola, Nokia and Qualcomm, forms the basis
for assessing Blackberrys performance, competitiveness and the ability to create long term
shareholder values.

VS.

I.

EXECUTIVE

COMPENSATION

This report carefully reviews the compensation awarded to senior executives, as this is an
important area in which the boards priorities are revealed. This report strongly believes that
executive compensation should be linked directly with the performance of the business the
executive is charged with managing. And the most effective compensation polices provide for an
appropriate mix of performance based short- and long-term incentives in addition to fixed salary
while promoting a prudent and sustainable level of risk-taking. This report will provide both
qualitative and quantitative analysis regarding the executive compensation of Blackberrys senior
executives.

QUALITATIVE ANALYSIS
Executive Compensation Philosophy
A compensation philosophy is a set of principals that guide the design, implementation and
administration of the compensation plan. It should drive the strategy that aligns an organizations
compensation with the organizations objectives. The executive compensation strategy of
Blackberry in Fiscal 2014 focused on following strategies objectives and general principles:

In first glance, the strategic objectives and general principle that support the executive
compensation strategic are clearly defined and reflect the companys intention and expectations
for executives. And Blackberrys circular describes the link between the organization s strategic
objectives and the executive compensation principles. However, some issues that I identified
regard Blackberrys executive compensations are listed below:

No change in compensation philosophy corresponding to the significant changes in

organization structure and strategy:
In general, if an organization expects significant changes in strategy, the philosophy should be reexamined. Compared Blackberry proxy circular 2014 to 2013, the company experienced
significant changes in organizational structure and strategy in 2013, but there is no corresponding
changes in compensation philosophy in 2014. The reason is unclear, either the company had
conducted a detailed assessment of Blackberrys compensation philosophy in its transition phase
and decided no changes are needed, or Blackberry is lack of governance on executive

compensation.
The lack of PSUs in compensation packages contradicts with the philosophy of pay for
performance:
6

The company claims that they utilized a pay for performance philosophy. Performance awards
should be based on intrinsically risk-adjusted financial and non-financial measures and should
include share-based awards such as Performance Share Units (PSUs) or a mixture of PSUs and
time-vesting Restricted Share Units (RSUs), with a greater emphasis on performance as the
primary vesting mechanism. However, the long-term incentive plan for all senior executives of
Blackberry includes only RSUs, but no PSUs. RSUs are time vested only, but not performance
vested. Thus, Blackberry compensation philosophy might contradicts with its practices.

Peer Group Benchmarking Practices

Companies' peer group benchmarking practices is a source of pay escalation that is divorced
from performance considerations. Companies undertake benchmarking in order to ensure that
their senior executives pay packages will stay competitive in the interest of attracting and
retaining key executives. While this is an important objective, there are no established standards
or rules for the practice. The report carefully review Blackberrys peer group benchmarking
practices and evaluate the rationale of peer selection in order to see the fairness and
appropriateness of Blackberrys executive compensation. The primary peer group was selected
on basis of the following objective selection criteria:

The objective criteria for selecting Blackberrys peer group are clearly set, but the actual
practices in selecting peers may contradicts with the criteria set when carefully reviewing each

companies in peer group. Here are some observation regarding Blackberrys peer group
benchmarking practices:

Geography difference with peers:

Blackberrys peers were selected primarily targeting U.S technology companies, which are in a
different region from Blackberry, which located in Canada. The U.S executive pay in
telecommunication industry may not fairly reflect Canadian executive pay in same industry as
U.S has a relative higher market price for top executives. However, Blackberry explained that
this is because the U.S telecommunication industry represents Blackberrys most direct

competitors for talents. This report believes that the rationale behind this practice is reasonable.
Relative company scope with selected peers:

Fig 2: Related size with selected peers (measured by market cap)

Less than 0.5X

Between 0.5X and 2X

Greater than 2X

Greater than 10X

0% 20% 40% 60% 80% 100%

"Fig 1: Related size with selected peers (measured by revenue)"

Less than 0.5X

Between 0.5X and 2X

Greater than 2X

Greater than 3X
0% 10% 20% 30% 40% 50%

Size matters in choosing peers. When

determining peer group, common practice is to select benchmarking peers whose size are
between 0.5 and two times of their own. To evaluate whether the related size with selected peers
is reasonable, this reports review the charts below, which shows the related size of Blackberry
with selected peers measured by revenue and market cap:

According to Fig 1, more than 20% of the comparator companies has revenues greater than 3
times of Blackberrys revenue, contradicts with what Blackberry claims in its benchmarking
criteria that no comparator company reported more than three times of Blackberrys revenue, in
each case as of the time the comparator group was chosen. The size of selected peers measured
by revenue is reasonable as the position of Blackberrys revenue is near the peer groups median.
According to Fig 2, approximated 80% of comparator companies market cap is 5 times greater
than Blackberrys, and more than 60% of comparator companies market cap is 10 times greater
than Blackberrys. This is contradicts with what Blackberry claims in the benchmarking criteria
that all the selected peers has similar market cap with Blackberry. As a shareholder, I strongly
suspect that the peer group Blackberry selected is effective, as the peer group does not consist of
organizations with similar size as Blackberry measured by market cap. And the unreasonably
large relative company scope inflates executive compensation of Blackberry since large market

cap peers are usually highly paid peers.

Industry focus of selected peers:
Blackberry claims that the selected peers are in same high technology and telecommunication
industry as Blackberry and have company products directly competes with Blackberrys
products.

10

Fig 3: Industry Allocation of Selected Peers

S emiconductor Industry; 24%

Telecom equipments industry; 29%

S peciality retail Industry; 12%

S oftware industry; 12%
IT services Industry; 24%

In order to see whether the industry focus of selected peers reflect Blackberrys business, the
following chart that shows Industry allocation of selected peers is provided:

Since BlackBerry has three business segments: hardware, software, and services, the peers
located in Telecom equipment industry, software industry, and IT services industry are have
similar business with Blackberry, thus are appropriate peers for Blackberry. According to the
graph, 65% of selected peers reflect Blackberrys business, while 35% of selected peers including
those in semiconductor industry and specialty retail industry might not reflect Blackberrys
business. This contradicts with Blackberrys benchmarking criteria that all selected peers have
products directly compete with Blackberrys products. However, The rational behind the peers
that did not reflect Blackberrys business should be examine. I believe that it is reasonable to
include companies in semiconductor sector as peers because they are include in technology

11

sector, and thus represents the types of companies that a company competes with for executive
talents. And I dont believe that it is reasonable to include companies in specialty retail industry
as peers because while in innovative business such as Blackberry, most employees are pay high
as the education and knowledge requirements for employees in high tech business are high, in
retail business, most employees are pay low, thus peers in retail industry does not reflect
Blackberrys business. But overall, industry focus of Blackberrys selected peers is appropriate.
All in all, the selected peers of Blackberry are appropriate given that the size of selected peers
reflect Blackberrys size measured by revenues and the industry focus of its peer group is
somewhat appropriate. The only issue is market cap of selected peers is unreasonably large
compared to Blackberrys market cap, which reflect that these selected peers with large market
cap might inflate the executive compensation of Blackberry and might become a factor that
contributing to disconnection of pay for performance.

Structure of Executive Compensation

The elements of Blackberrys executive compensation are summarized below:
Elements and Purpose

Measurement

Target and Range

Pay
Form
Cash

Performa
period
One Year

Base Salary
Minimum compensation to secure dayto-day services and reflects the
Executive Officers role, performance,
experience and contribution to the
company, size of the company and
competitive benchmarks.

Based on market data for the

position, and both qualitative and
quantitative factors of the
executive.

Fixed

Annual Incentive
Designed to motivate and reward an
executive for contribution to the
achievements of the company and
individual goal set for the fiscal year.

Based on AIP Formula= NEO

Base Salary* Annual Incentive
Target %* Company performance
factor 0 to 1.5* Individual
performance Modifier 0 to 2

CEO- fixed at 200% of

base salary
NEOsRange from 0 to 3 times
annual incentive target

Cash

One Year

Long-Term Incentive
Allows executives to receive
compensation under the equity
incentive plan
Designed to advance the interests of the

Based on external market data,

the position, level and
performance of the individual,
and the companys past grants to
the executives.

No more than 10% of the

Companys outstanding
common shares are issued
to insiders in any one-year
period (maximum

RSUsCEO

5 years

12

company by encouraging participation

through the acquisition of common
shares, enable the company to attract
and retain executives, and align the
interests of executives with the
interests of shareholders.
Retirement Savings
Designed to assist executives in saving
for retirement.
For executives to be responsible for their
retirement savings.
Other compensation
Benefits: health, dental, life insurance
and disability coverage.
Perquisites: established on a case-bycase basis as considered appropriate in
the interests of the company.

Match each Canadian based

employees contribution to the
group registered retirement
savings plan, and each U.S based
employees contribution to the
U.S 401(k) plan.
Based on competitive practices
and case by case basis

13,375,000 shares in
2014). The value of the
pay fluctuates with value
of common shares

RSUs +
Stock
optionsNEOs

Fixed

N/A

N/A

Fixed

N/A

N/A

Comments on Blackberry Annual Incentive Plan:

Time Horizons:
Semi annual goals had been established in fiscal 2013. The company return to an annual time
horizon for the measures and payouts in fiscal 2014. The reasoning behind this change in time
horizon is in recognition of the need to focus on the full year performance of blackberry and on
long-term objectives. As a shareholder, I believe that this is a green flag for Blackberry because
shorter time horizon for payouts and measures rewards brief bursts of performance, and create
executive myopia in that executives will not even need to care about what happens a year out,
just in the next six months. It might be less likely that managements actions could result in short
term profit and long-term losses in high tech industry, which Blackberry is in than in finance

industry. But it certainly isnt impossible.

Design of annual incentive plan and cap
Blackberrys annual incentive plan is formulaic; the annual incentive plan formula is presented
below:

13

Blackberry adopt a hybrid approach in its annual incentive plan in which bonus is determined
through the multiplication and weighting of performance result. This is a fully formulaic
approach. I believe this is a potential red flag for Blackberry because all incentive plans should
have some element of discretion that allows compensation committees to have discretion if
unusual circumstances arise. Such discretion would allow actual incentive awards to be adjusted
upward or down from the incentive awards earned under a formulaic plan. The lack of some
discretion in annual bonus plan may reflect less capability of Blackberry to handle potential risks.
According to the annual incentive plan formula; the cap for annual incentive is 3 times (1.5
company performance factor * 2 individual performance modifier) the annual incentive target.

Participants
All NEOs are participants under the AIP. However, the CEO, Mr. Chen, is not a participant of the
AIP and has a guaranteed 200% of base salary performance bonus listed in his terms of
employment agreement. This is a red flag for Blackberry that there is no short-term incentive

plan for the CEO who is the key active player for Blackberrys success.
Target Metrics and Actual results:

Blackberry adopts a mix of corporate and individual performance measures to determine annual
bonuses. As a shareholder, I believe that this is a green flag for Blackberry. The target metrics of
Blackberrys company performance factor includes revenue, EPS, and Liquidity position, which
are financial metrics, and BB10 Success, which is non-financial metrics. The annual incentive
plan shows the detailed threshold, target, max for each metrics, and also the actual results. It is a
green flag that Blackberry disclosed both target metrics and the actual results, so that providing
shareholders with clear information of how and why the bonus is paid. In fiscal 2014, Blackberry
missed all the targets, and gets a 0% company performance factor. The individual performance
modifiers is determined by reviewing the executives performance relative to objectives
established for fiscal 2014 and the executives contribution to the companys performance are

14

evaluated using a rating scale of 0 to 2. There is no disclosed regard the metrics for individual
performance modifiers. Whether the individual performance modifiers are determined based on
formula, discretions, or combination of both is not disclosed too. This is a serious red flag for
Blackberry. As a shareholder, I highly suspect that Blackberry executive pay is aligning with
performance, because all NEOs get decent pay while company underperformed all target metrics

and there are no explanations of how the individual performance modifier is determined.
Changes in future AIP
Blackberry disclosed in its 2014 proxy circular that the fiscal 2015 annual incentive plan will
eliminate the individual performance modifier. That is, in fiscal 2015, the annual incentive plan
of Blackberry will only focus on company performance, but not individual performance. This is a
red flag for Blackberry, as the potential lack of individual performance evaluation in the
incentive plan will further make the performance of executives misalign with their pay, and
further destroy shareholder value.
Special Bonuses for Performance
Blackberry disclosed in its fiscal 2014 Proxy that there is a special achievement bonus program
for the Executive Officers approved by the Board since 2012, and there are two performance
criteria for receiving the special bonus: (i) cash and liquidity maintenance above a $1.5 billion
threshold and (ii) Blackberry 10 launch success (to be determined at the discretion of the Board).
The question is why executives get this special bonus and is this a red flag? Firstly, the special
bonus is granted based on the executives ability to maintain the liquidity position above $1.5
billion which is less than the threshold and target for liquidity position listed in the annual
incentive plan, this might dis-incent the executive to achieve the $2.00 billion threshold and $2.5
billion target of liquidity position required in annual incentive plan because the executive can get
a special bonus by only achieve $1.5 billion. Secondly, the non-financial metric, Blackberry 10
success, is determined at the discretion of the Board, and there is no specific criteria disclosed in

15

proxy for determining the success of Blackberry 10. As a shareholder, it is very hard to convince
me that why the executive can get a special bonus, and I viewed this as a red flag.
Compare Blackberrys AIP with the 5 selected peers:
Peers

Approach

Target and
actual
results

Google

Fully discretionary

NO

Nokia

Fully Formulaic only based on

company performance

No

Fully Formulaic based on both

company and individual
performance
Fully formulaic based on both
company and individual
performance
Formulaic based on company
and individual performance+
some discretions

Motorola
Solutions
Cisco
Systems
Qualcomm

Blackberry

Fully Formulaic based on both

company and individual
performance

The design of Blackberrys AIP

is not effective as Qualcomm
since Qualcomm
incorporated some discretion
into its AIP.
The design of Blackberrys AIP
is effective than Google as
too
much discretion do not
Comments
include measureable and
specific goals, and the
participants are not clear
what their bonuses are based
on and do not know what
they need to do to earn an
incentive awards.

Caps
CEO- 400% of base salary
NEOs- 250% of base
salary
CEO-250% of base salary
NEOs- 200% of base
salary

Time
Horizon

Participants

Special
Bonus

1 year

CEO+ All NEOs

NO

1 Year

CEO+ All NEOs

NO

YES

196% of annual incentive

target, 392% of base salary

1 year

CEO+ All NEOs

YES

YES

269% of annual incentive

target, 538% of base salary

1 year

CEO+ All NEOs

NO

YES

200% of annual incentive

target, 400% of base salary

1 year

CEO+ All NEOs

NO

1 year

All NEOs excepts

CEO

Yes

A significant red
flag for
Blackberrys AIP
is that the
contractual
payments for
CEO is
problematic
because the CEO
get a guaranteed
bonuses and not
participates in
AIP. This creates
misalignment
between CEO
pay and
performance.

A
potential
red flag
for
Blackberr
ys AIP

Compared to Blackberrys AIP:

CEO-Guarantee 200% of
base salary
YES
NEOs-600% of base salary
(300% of target annual
bonus)
Blackberrys Blackberrys cap of 3
AIP is
times the annual
effective
incentive target (6 times
than Google
of base salary) is too
and Nokia
high, considered that
regarding
Cisco system,
that
Qualcomm and Google
Blackberry
is significantly
disclosed
outperform Blackberry
the target
in revenue, Market cap,
metrics and
gross profit, and gross
actual
profit margin. This
results,
indicates that there is a
while
potential misalignment
Google and
between executive pay
Nokia fail to
and performance.
do that.

N/A

Comments on Blackberry Long-Term Incentive Plan:

According to Fig 4 below, in fiscal 2014, Blackberrys LTIP includes only RSUs for all NEOs
including CEO without any stock options or PSUs, that is 100% RSUs, As a shareholder, I
16

strongly concern about Blackberrys LTIP, as the LTIP for all NEOs is very problematic and
totally ignored pay for performance and the alignment between executives interests with
shareholders interests.

Fig 4: Blackberrys LTIP mix for executives in 2014

In fiscal 2014, Chen was granted an award of 13 million time-based RSUs with a grant price of
$6.52 in connection with his appointment as Executive Chair and Interim Chief Executive

RSUs
Officer in November 2013. 25% of100%
these RSUs
vest on each of the 3rd and 4th anniversaries of
the effective date of his employment agreement, with the remaining 50% vesting on the 5th
anniversary. As all we know, RSUs are assigned a fair market value when they vest, the value of
these awards are unrelated to performance, and depends entirely on Blackberrys share price.
Blackberry may argue that share price is a measure of how well the company is doing. However,
share price is not a fair measure of executives performance because it often influenced by factors
that are beyond the executives control. Share prices can rise or fall for reasons that have nothing
to do with the companys performance. With 100% RSUs in CEO and other NEOs pay package
means that the strength of performance-based compensation (ratio of performance-to- time-based
equity awards) is zero, and thus all of the executives long-term bonuses were not based on
performance.

17

As a shareholder, I strongly believe that this is a catastrophic red flag for Blackberry because
even if Blackberrys stock price plummet and shareholders suffer serious loss, say the share price
drops from $6.52 to $1, the CEO can still get a guarantee of $13 million long term bonuses
without contributing anything. However, the 100% RSUs is also a risk for CEO because if the
share price continuing going down, the RSUs worth little.
Compare Blackberrys LTIP mix with that of its five selected peers:

Stock options
Blackberry
Google
Nokia
Motorola
Solutions
Cisco System
Qualcomm
Prevalence of
5 selected
peers

All

of

its

peers

PSU

RSU

incorporated PSUs in

that Blackberrys LTIP

4/5

(Only for
NEOs)

5/5

their

LTIP

for

5/5

represents

reflecting

executives
a

misalignment between

pay for performance, and is ineffective compared to its peers who at some extent connects

executives pay with performance.

Double Trigger Acceleration
Blackberry disclosed that the committee adopted a double trigger treatment, which requires a
change in control followed by a qualifying termination of an executives employment. As a
shareholder, I view this as a green flag because ISS suggests in its policies that double trigger
vesting of equity awards is currently the best market practice. And double triggers prevent

18

executives from receiving payment for a takeover while also receiving salary and awards, but
still allow compensation for executives being pushed aside during a takeover.

Fairness of CEO long term bonus in the perspective of long-term shareholders:

To see whether the CEOs LTIP is fair for long-term shareholders, this report compared the
highest historical share price in past three years with year 2014 share price to see in order to
justify his pay what CEO has to perform to compensate shareholders for their loss in returns.

Based on the data regarding historical share price of Blackberry in past three years, the highest
points in past three years is $68.92 per share in Feb. 2011. Compared with $6.25 per share
granted to Mr. Chen in 2014, Mr. Chen has to increase the share price by $62.67 (Approximately
10 times current share price) in order to help long-term shareholders get their return back and
justify his own pay. Thats say, to be fair for long-term shareholders, the CEOs pay can only be
justified if the company rewards CEO only when there is a huge improvements (+$62.67) in its
current share price. However, the actual practice is the CEO can get a guaranteed $84.76 million
($6.52* 13000000) long-term awards without any efforts to improve the share performance and
recover the loss of long-term shareholders. Blackberry should consider give Mr. Chen stock
options so that he would only get paid if the share appreciates or give 100% PSUs to Mr. Chen in
which a performance
Comments on Blackberrys Severance Benefits:
Executive severance benefits are controversial, especially when they result in large payments to

19

executives who have performed poorly. Severance benefits should not be paid to executives who
are fired or who resign in lieu of being fired for poor performance. The amounts of compensation
in executives severance arrangements can be excessive, especially in light of the amounts of
other compensation that executives typically receive.
As a shareholder, I am very concerned about Blackberrys compensation plan. Blackberry s
compensation is excessive, especially considering its ongoing poor performance. The primary
concern is related to the compensation of the outgoing and incoming CEOs. Under the leadership
of Mr. Heins, Blackberry failed to achieve a turnaround and shareholder value depreciated
significantly. However, his severance package was an astonishing $49.7 million. The practice of
lucrative pay continues at Blackberry with the newly hired CEO, Mr. Chen. Mr. Chen was given
a sign-on bonus of restricted shares worth $85 million. These shares have no performance
requirements and vest solely through the passage of time. While I agree that Blackberry needs to
attract good executives to regenerate its fortunes, this type of bonus is much higher than market
norms. And without performance requirements for this bonus, Mr. Chen could, like Mr. Heins, be
handsomely rewarded for failure.

QUANTITATIVE ANALYSIS
This report will adopts the three methodology suggested by ISS to measure how well
Blackberrys CEO pay has been aligned with its financial performance. The three measure of
Pay-for-Performance are: Relative Degree of Alignment (RDA), Multiple of Median (MOM),
and Pay-TSR Alignment (PTA)

Relative Degree of Alignment (RDA)

This relative measure compares the percentile ranks of a companys CEO pay and TSR
performance, relative to an industry-and-size derived comparison group, over one- and three-year

20

periods. Since Blackberrys new CEO is on the position for only 1 year, the measure is over one
year period. The summary compensation for CEOs (Blackberry + its 5 selected peers) and its
corresponding statistics below shows the percentile of the 5-selected peers CEO pay and
Blackberrys CEO pay position among these peers in fiscal 2014:

Statistical Summary of Blackberrys CEO pay position

Blackberrys Position

21

Discussion:

The Base salary, STIP, as well as the Total Cash Compensation for Blackberrys CEO is
approximated 3 times below the 25 th percentile meaning cash incentives paid to Blackberrys
CEO is significantly lower than its peers. This is reasonable because Blackberry is in its critical

transitional year and the companys liquidity position is essential for its success.
The LTIP for Blackberrys CEO is approximated 8 times above the 75 th percentile and 17 times
above the median meaning the percentage of pay-at-risk given to Blackberrys CEO is
dramatically higher than its peers. And the sky high LTIP for Blackberrys CEO contributes to its
sky-high total direct compensation which is 7 times higher than median for its CEO. If
Blackberry is able to continuing outperform its peers, the use of RSUs in LTIP can generate share
awards for the CEO, which can explain this high payout of Blackberrys high long-term payouts
to its CEO. However, if it is not the case, that is Blackberry is unable to outperform its peers, the
CEOs high long-term payout is not justified and unfair to shareholders. Thus, whether the high
equity incentives and high total direct compensation are justified depends whether the 7 times
higher than median total direct compensation for Blackberrys CEO reflect 7 times higher

22

performance than peers? The table below help to analyze whether the high compensation for
Blackberrys CEO is justified by comparing Blackberrys performance with its peers:
Relative Performance analysis of Blackberry compared with its 5 peers (in millions$ except for TSR
and EPS)
Sources from Blackberry, Nokia, Motorola solutions, Google, Cisco systems and Qualcomms fiscal
2014 financial reports
Peers
1-year
EPS
Revenue
Liquidity position
Research and
TSR
(Fiscal 2014 ending cash balance)
development
Nokia
1.15
0.31
$12,732
$2,524
$2,364
Motorola
0.20
-2.84
$5,881
$3,954
$681
Solutions
Google
0.51
20.27
$66,001
$8,484
$9,382
Cisco systems
0.08
1.49
$47,142
$6,726
$6,294
Qualcomm
0.16
4.4
$26,487
Compare Blackberry with statistical results:
Blackberry
-0.22
-11.18
$6,813.0

$7,907

$5,447

$1,579.0

$1,286.0

75th Percentile

0.51

4.40

$47,142.0

$7,907.0

$6,294.0

50th Percentile

0.20

1.49

$26,487.0

$6,726.0

$5,447.0

25th Percentile
0.16
0.31
$12,732.0
$3,954.0
$2,364.0
Statistical Summary of Blackberrys Performance Position
Average
0.42
4.73
$31,648.6
$5,919.0
$4,833.6

Blackberrys position

1-Year TSR

EPS

23

Revenue (in Liquidity

Billion) position (In Billion)
R&D (In Billion)

The TSR, EPS, Revenue, Liquidity position, and R&D are important metrics to evaluate the
performance of companies operating innovative business. From the statistics above, we can see
that Blackberrys TSR, EPS, Revenue, and liquidity position are significantly lower than the 25 th
percentile of its peers, and the amount of money contributed to R&D which determined the long
term profitability of the company are significantly lower than 25 th percentile of its peers. While
Blackberrys CEOs total direct compensation is approximated 7 times higher than its peers, its
performance is far lower than its peers. The sky-high compensation for Blackberry CEO is not
justified base on the relative performance analysis. As a shareholder, I view this as a serious red
flag of misalignment between pay and performance in Blackberry.
Combine the CEO Pay statistics and the Performance statistics to determine the RDA
measure:
Todeterminethismeasure,thisreportcombinesandrankstheperformanceandCEOpayof
Blackberryandits5selectedpeers.TheperformanceranksisbasedononeyearTSR,andthe
oneyearpayamountsforCEOofBlackberryandthecomparisoncompaniesarebasedonthe
fiscal2014discloseddataavailableintheeachcompaniesproxycircular.

24

The RDA graph above shows that there is a high degree of misalignment between Blackberrys
Performance and the CEO pay in Fiscal 2014, with extremely high pay and very limited
performance.

Multiple of Median (MOM)

ThisrelativemeasureexpressestheprioryearsCEOpayasamultipleofthemedianpayofits
comparisongroupforthesameperiod.
MOM =

Blackberr y ' s CEO pay 2014

$ 85,753,220
=
=6.96
The median pay for its 5 selected peers2014 $ 12,315,401

The MOM is unreasonably high especially when we take into account Blackberrys poor
performance in Fiscal 2014.

Pay-TSR Alignment (PTA)

This absolute measure compares the trends of the CEOs annual pay and the value of an
investmentinthecompanyoverthepriorfiveyearperiod.Thechartbelowshowsthatthevalues
ofBlackberryspayandIndexedTSRthevalueofa$100investmentinvestedintheendof
2009attheendofeachfiscalyear(assumingdividendsarereinvested):

25

Discussion:

The Index TSR drops dramatically from 2011 to 2012, but the pay for former CEO, Mr. Hein,
increases. Although the CEO pay decreases a bit in 2013 to reflect the 2011 declines in index
TSR, the pay amounts to Mr. Hein in 2013 is still much higher than the amounts in 2011 and
2010 when the Index TSR is very high. This reflects that Blackberrys former CEOs pay is

disconnected with his performance.

The index TSR continuing drop from 2013 to 2015, While Blackberry pay its new CEO, Mr.
Chen, a sky high pay in 2014, represents a huge misalignment in pay and performance. However,
in 2015, the new CEOs pay drops dramatically. This reflects the risk exists in Mr. Chens pay
package, which includes a high percentage of at-risk-pay (100% RSUs). If the share price of
Blackberry continuing drops, the value of RSU awards will worth very little. The decrease in Mr.
Chens pay amounts reflects his high-risk pay package. The drops in CEO pay in 2015 is in
response of the drop in Blackberry share price, but not necessarily the drop in TSR, thus this may
not represent that the CEOs individual performance is bad as the change in share price can be
affected by many factors that the CEO can not control.

26

II.

DIRECTOR

COMPENSATION

This report will provide both qualitative and quantitative analysis regarding the compensation
package for Blackberrys Director.

QUALITATIVE ANALYSIS
Boards compensation philosophy
The CNG Committee reviewed director compensation with a view to ensuring that director
compensation to:

Remain competitive
Reflect the companys global position
Remain sufficient to attract and retain directors

Directors who are also officers of the company receive no additional remuneration for acting
as directors.
Discussion:
Blackberrys disclosure of director compensation is not detailed; the explanation of Blackberrys
compensation philosophy for its Board covers only few lines, and the information regarding
approach and process of the director compensation process is not disclosed.

Director Compensation Structure

27

The elements of Blackberrys director compensation is as outlined in the table below:

Fiscal 2014 in Canadian

Compensation
Initial retainer

dollars
$150,000

Annual Board Retainer2

$200,000

Additional annual retainer for Board Chair

Additional annual retainer for Audit and Risk Management

$75,000
$25,000

Committee chair
Additional annual retainer for CNG Committee Chair
Additional annual retainer for Strategic Planning Committee

$20,000

Initial
onetime
Board

$10,000
Chair

retainer:
Paid to each new director who is not a Company officer upon becoming a member of the Board.
Blackberrys directors are paid in form of cash and/or DSUs.
Annual Board retainer:
Reflects a fixed portion of a directors compensation. It is the base fee paid annually to directors
regardless of their participation rate. Blackberrys directors are paid in form of cash and/or
DSUs.
Meeting fee:
A meeting fee reflects a variable pay of a directors compensation. Blackberry does not pay
meeting fee to directors for attending board and committee meetings. However, directors are
reimbursed for out-of-pocket expenses for attending Board and committee meetings.
Equity Grants (DSUs)

28

DSUs, a form of deferred compensation, are grant to directors in Blackberry with the purpose of
attracting, retaining, and motivating director commitment and performance.
Discussion:
Various retainers paid to directors are clearly disclosed.

Share Ownership Guidelines

Each director who is not an officer of the company should hold Common Shares and/or DSUs
with an aggregate value of no less than four times the CDN $200,000 annual retainer paid to each
director. And directors are expected to reach the guideline ownership level within five years of
joining the Board. And the outstanding DSUs awards are listed below:

Discussion:
The director share ownership requirements and current director share ownerships are disclosed.
However, whether the guideline met for each director in Blackberry is not disclosed.

QUANTITATIVE ANALYSIS
Compare Blackberrys Director retainers and Meeting fees with its peers

29

Discussion:
As shown in the table, Blackberrys annual board retainer, Audit and Risk management chair
retainer, compensation committee retainer, governance and nominating committee chair retainer
are close the average. This may reflect that theses retainers paid to directors are fair and reflect
market average. One issue here is the board chair retainer is approximately 3 times higher than
the average, which might be a red flag for Blackberry. This issue is not problematic to
Blackberry, because directors who are also officers of the company receive no additional
remuneration for acting as directors, Mr. Chen as both CEO and board Chair is not an
independent director thus would not get the board chair retainer.

30

Compare the average amount an individual director of Blackberry might

make in aggregation in fiscal 2014 to that amount pay to each director of its
peers:

31

Calculation of Google Average, Motorola Average, Cisco System Average, Qualcomm Average and Nokia Ave

Discussion:
The average amount an individual director in Blackberry might make in aggregation is lower
compared that average amount pay to an individual director in the comparator companies. This
low average amount pay to an individual director in Blackberry may due to the facts that the
annual retainers given is low and there is not meeting fees. The low average pay for directors in
Blackberry might compromise the companys ability to encourage directors commitment to
effectively oversee management. This brings a potential risk to Blackberry that the governance
may be inadequate and the executive compensation may still fly high as there might be lack of
oversight on executive compensation issues.

32

III.

GENERAL GOVERNACE

ISSUES

Proxy circulars should articulate a companys governance practices clearly in order to help
readers to assess whether the company has a high performance board. This session discusses
Blackberrys governance practices in following areas:

Director Attendance
According to CCGG, the board should publish the record of individual director attendance at
board and committee meetings every year in the proxy circular, Directors are expected to attend

33

every board and applicable committee meeting, absent exceptional circumstances. The table
below shoes the attendance records of Blackberrys directors:
Directors
John Chen

Attendance
1/1

Attendance in %
100%

(Non independent Executive Chair of the Board)

Timothy Dattels

40/40

100%

(Independent Director)
Bert Nordberg

1/1

100%

(Independent Director)
Claudia Kotchka

29/31

94%

(Independent Director)
Richard Lynch

40/42

95%

(Independent Director)
Barbara Stymiest

53/53

100%

(Independent Director)
Perm Watsa

13/13

100%

(Independent Lead Director)

In fiscal 2014, all members of the Board attended 90% or more of the total meetings of the
committees. However, no explanation regard why 2 of the directors missed few meetings. In
addition, to maintain independence from management, the Board and its committees meet
without management at each regularly schedule meeting and at any other times as they determine
is necessary. This is a green flag for Blackberry.

Majority voting
From a shareholders perspective, the right to vote is critically important. Thus every public firm
must have a voting system that supports shareholder democracy. According to CCGG, the best
practices is to adopt a majority voting policy for uncontested director election and the Board
should give serious consideration to the voting results for shareholder proposal even if the
resolutions are only advisory in nature. The Board of Blackberry adopted a Majority Vote Policy

34

since 2011 and the policy applies to an uncontested election of Board nominees and say on pay
votes.

Board Structure
Board Size
According to Corporate Governance Matters, the size of the board of directors tends to be
related to the size of the corporation. It is recommend that companies with annual revenues of
$10 million have 7 directors, on average, and companies with revenues of more than $10 billion
have 11 directors, on average. Based on company size of Blackberry (closed to $10 billion
revenue), the current board size is relative small, meaning that the Blackberrys board might be
not large enough to have adequate resources to dedicate to both oversight and advisory functions,
and to allow for greater specialization to the board through diversity of director experience. This
might be a red flag for Blackberry.
Skill Matrices
Its directors drive the character and effectiveness of a board. Thus the most basic corporate
governance requirement is to have directors that are highly competent and bring the requisite
knowledge and experiences to the Board. According to CCGG, the best practices are:

A significant numbers of directors of a board should have career experience and expertise
relevant to the corporations industry, financial responsibilities and risk profile, other directors

will bring specific expertise;

All directors should be financially literate, and Chair of the Audit Committee should be financial
expertise
The table below shows the skill metrics of Blackberrys Directors:
Skills
John
Chen

Bert
Nordberg

Timothy
Dattels

Directors
Claudia
Richard
Kotchka
Lynch

Barbara
Stymiest

Perm
Watsa

35

Advance Technology
Industry and Research
Experience
Executive Leadership
Strategic Leadership
International Business
Corporate Finance
Investment
Management
Brand Marketing and
Communication
Design and Innovation
Corporate Strategy
Risk management
Corporate Governance
Accounting
Public Company
Board Experience

According to the table above, the chair of audit and risk management committee, Barbara
Stymiest, has expertise relevant to finance, accounting and risk management. However, the chair
of governance/nominating committee and compensation committee, Perm Wasta, do not has
expertise relevant to governance, HR, or executive compensation, but has the expertise relevant
to Blackberrys industry. And a majority of directors do not have expertise in technology or
significant knowledge of the industry. This may reflect a red flag for Blackberry.
Director Independence
According to CCGG, in order to ensure directors interests are aligned with shareholders, at least
2/3 of every board should be independent of management. In Blackberry, six of the seven current
Board members qualify as independent directors, and one of the current Board members, John
Chen, does not quality as an independent director. Thus a majority of the current Board members
are independent. This is a green flag for Blackberry.
Independence of Board Chair

36

The board chair and CEO have different responsibilities. As chair is accountable to shareholders,
and the CEO is accountable to the Board, combining the positions creates conflicts of interest
and obscures accountability. According to CCGG, the best practice is that the board chair should
be independent with management in order to function in a non-executive capacity. In Blackberry,
the CEO, Mr. Chen, is also the Chairman of the Board. From the perspective of shareholders, this
is a serious red flag for Blackberry as it is very easy for the executive chairman to capture the
Board and peruse personal interests.
Board committees Independence
According to CCGG, an effective board has clear roles and responsibilities that establish
mandates for board committees and ensure committee independence. The best practice for the all
committee is all members must be independent.
In Blackberry, the role of Audit committee Chair is not separate with the role of Risk
management Chair. However, this might compromise the independence of both roles because of
potential conflict of interests. In general, the risk management committee develops and
implements the risk management framework and the audit committee audits the adequacy and
effectiveness of the risk management framework. If the audit committee and risk management
committee are not separate, thats mean that audit committee is forced to review its own work.
The practice of combined role of audit committee chair with risk management committee chair
compromises the independence of both roles. Moreover, in Blackberry, the role of
nominating/governance committee chair is not separate with the role of compensation committee
chair, this combined roles might also compromise the independence of nominating/governance
committee and compensation committee. These are two red flags for Blackberry.
Director Interlocks

37

Too much interlocks suggest a degree of inter-related interests that might be detrimental to
director independence. Board should have policies to limit interlocking board relationships.
Blackberry disclosed that current number of interlocks is zero, which is a green flag for
Blackberry. However, there is no policy in place to limit the number the interlocks, which might
be a potential red flag for Blackberry.
Board Diversity
An effective board should comprise of directors with wide variety of experiences, views and
backgrounds, which reflects the gender, ethnic, cultural, and other personal characteristics.
John
Chen

Timothy
Dattels

Claudia
Kotchka

Richard
Lynch

Barbara
Stymiest

Perm
Watsa

Bert
Nordberg

U.S

CHINA

U.S

U.S

Canada

Canada

Sweden

Male

Male

Female

Male

Female

Male

Male

The table above shows that the board members in Blackberry are quite diversified in ethnic and
gender perspectives. This is a green flag for Blackberry as diversity helps the boards overcome
tendencies toward groupthink, in which directors reach a consensus too quickly because of the
way social similarities shape their perceptions and decision-making, and also encourage healthy
debate among board members.

Director Evaluation
A board needs process in place to evaluate and improve the performance of individual directors,
board committees and the performance of the board as a whole. According to CCGG, the best
practice is for individual directors to evaluate the performance of each other every year using a
confidential peer-review survey. Blackberry disclosed in its 2014 proxy circular that The CNG
Committee monitors the effectiveness of the operation of the Board, Board committees and

38

individual directors and recommends improvements to each of the above through an annual
effectiveness questionnaire that is completed by each director, the Board, its committees. Their
respective chairs and individual directors are formally assessed with respect to their effectiveness
and contribution. This is a green flag for Blackberry as annual performance reviews help
directors assess their personal strengths and weaknesses, make decision about the need for
further education, and decide when it might be appropriate to step down.

Shareholder engagement
Boards need to make every effort to help shareholders understand the boards governance
policies and how the board fulfills its responsibilities to effectively oversee management.
Engagement between shareholders and the boards allows each group to explain its perspectives
on governance and disclosure practices.
Say on Pay policy
According to CCGG, Say on pay is an important part of this engagement process because they
give shareholders a formal opportunity to express their view on the boards approach to executive
compensation. CCGG recommends that boards voluntarily add a shareholder advisory vote to
each annual general meeting agenda. Blackberry disclosed in its proxy that it voluntarily adopted
the say on pay regard the executive compensation issues. This is a green flag.

Proxy Advisory Firm Comments

According to Key Proxy Vote Survey Prepared by SHARE in 2014, the recommendations by
various proxy advisory firms regard shareholder vote on the proposal of Blackberrys approach to
executive compensation are listed below:
Proxy Advisory Firms
SHARE
Glass Lewis & Co. LLC
ISS Canada- Proxy Advisory Services

Recommended Vote
Against
Against
Against
39

Manulife Asset Management

RBC Global Asset Management
State Street Global Advisors Ltd
Toron- AMI international Asset

For
Against
Against
Against

Management
AllianceBernstein Institutional Investments
Against
Amundi Asset Management Canada
Against
Fiderlity Investments Canada Limited
Against
Groupe Investiseement Responsable
Against
Hillsdale Investment Management Inc.
Against
Invesco Canada Ltd
Against
All most all proxy advisory firms recommend that shareholders vote against the Blackberrys
approach to executive compensation. Here are some reasons of why the proxy advisory firms
voted against:

The concern that Blackberrys compensation is excessive, especially considering its ongoing

poor performance,
The concern that is related to compensation of the outgoing and incoming CEOs: executive in
Blackberry who are fired and who resign in lieu of being fired for poor performance would still

get paid.
The concern that the combined role of Board Chairman and CEO in Blackberry that
compromises the director independence and creates conflicts in areas of CEO performance
evaluation, executive compensation, and long-term succession planning.

Say on Pay Voting Results

Although almost all proxy advisory firms recommended that shareholders vote against
Blackberrys say on pay resolution, at the companys 2013 annual and special meeting of
shareholders, 84.23% of shareholders voted in favor of the advisory resolution; and at last years
annual and special meeting of shareholders, approximately 84% of the votes cast were in favor of
the Say on Pay resolution. The disparate outcomes reflect that institutional investors are

40

starting to make their own decisions, rather than relying on sometimes questionable conclusions
drawn by the proxy advisory firms based on their particularly methodology.

Blackberry Red Flags Vs. Green Flags Regarding Its Governance Practices
Director Attendance
Majority Voting
Board Structure:
Board Size
Skill Matrices
Director Independence
Independence of Board
Chair
Board Committees
Independence
Director Interlock
Board Diversity
Director Evaluation
Shareholder
Engagement
Proxy Advisory Firm
Comments
Say on Pay Results

Red Flags

Green Flag

41

REFERENCES
Blackberry Limited. Management Information Circular for the Annual and Special Meeting of
Shareholders, June 19,2014,
<http://ca.blackberry.com/content/dam/bbCompany/Desktop/Global/PDF/Investors/Governance
/Proxy_Circular_Fiscal_2014.pdf>
Catherine Smith, Senior Research Analyst and Manager of Proxy Voting Service, SHARE, Key
Proxy Vote Survey, 2014, < http://www.share.ca/files/ProxyReview-2014-English.pdf>
David Larcker and Brian Tayan, Corporate Governance Matters April 14,2011, Published by
FT Press
Carol Bowie, Steve Silberglied, and Liz Williams, Evaluating Pay for Performance Alignment:
ISSs Quantitative and Qualitative Approach November 2014, <
https://www.issgovernance.com/file/publications/evaluatingpayforperformance.pdf>
Kevin Smyth and Marshall Eidinger, CCGG Releases Annual Best Practices for Proxy Circular
Disclosure, October 2014,
< http://www.canadiansecuritieslaw.com/2014/10/articles/continuous-timely-disclosure/ccggreleases-annual-best-practices-for-proxy-circular-disclosure/>

42

APPENDIX

Google Average:

Motorola Solutions Average:

Cisco System Average:

43

Nokia Average:

Qualcomm Average:

44