Canadians who watched smugly as American regulators cracked down on big executive bonuses, thinking that we do better here, may have to think again.

A recent study suggests 12 of the companies in Canada's TSX 60 index have corporate governance issues that make them a serious risk to investors. Another 10 companies are called a moderate risk.

A U.S. consultant cites Canadian companies that pay bonuses even when performance doesn't measure up. (CBC)

The study was done by The Corporate Library, a Portland, Maine,-based firm that rates the risks of investing in 3,300 North American companies and — for a fee — provides its findings to big investors such as pension and mutual funds.

The 60 companies in the index are big, blue-chip, firms — banks and resource companies predominate — that represent 73 per cent of the value of all shares traded in Canada. That means the chances are good that many Canadians hold some of them directly or through their pension or mutual funds.

Corporate governance refers to the policies and procedures followed by those who sit on corporate boards of directors and who are supposed to hold executives' feet to the fire in order to protect the interests of shareholders.

Discretionary bonuses a problem

The study looked at everything from compensation to how independent directors were from executives. It found several cases where compensation policies did not align the interests of executives with those of the shareholders. One example: discretionary bonuses, those paid even when the company didn't reach performance targets.

"That is something that we picked up in a number of the TSX 60 companies," Kimberly Gladman, director of research and ratings, told CBC News. She wouldn't disclose which 22 companies raised warning flags. Someone would have to pay her firm $850 US to find that out.

Companies increased discretionary bonuses during the downturn. (CBC)

Companies paid more discretionary bonuses than usual last year as the downturn cut into company performance, Gladman said.

She found directors gave reasons that amounted to "'because you're such a great person, you did such a good job, or you really made a good effort,'" even though the company didn't make its profit targets.

The Corporate Library would prefer to see bonuses tied to several measures of performance — such as minimum profit or revenue — and that are only paid if the goals are met.

'Bad governance costs you money.' — Kimberly Gladman, The Corporate Library

"We don't think that good governance necessarily makes you money, but bad governance costs you money," said Gladman, who comes from a background in the socially-responsible-investment industry. That means funds that try to achieve both high financial returns and social good.

The Corporate Library has even hired an outside firm to measure that. That firm found that investing in the companies in an American index — the Russell 1000 — minus those the Corporate Library identified as having poor governance, would have earned a 2.5 per cent higher return in each of the five years from 2003 to 2007.

American regulators have been focused on executive compensation as never before, scrutinizing thousands of financial institutions on how much they pay their managers. Federal Reserve chairman Ben Bernanke has blamed excessive bonuses for encouraging risk-taking behavior that led to the financial crisis.

Here the concern is not with bonuses encouraging risky behavior, but rather those unrelated to performance of any kind, or "pay for pulse." Those are bonuses that kick in on a certain date, regardless of performance, and which executives collect if they just hang long enough.

Beth Hamilton-Keen, senior portfolio manager at Calgary-based Mawer Investment Management Ltd., disagreed that corporate governance policies alone say much about investment risk.

'My reaction is that that's an overreaction.' — Beth Hamilton-Keen, Mawer Investment Management

"My reaction is that that's an overreaction," she said, adding that it would be "very risky.

"It's too narrow, there are too many things you could miss. A company can have great corporate governance in place but just not be profitable."

Mawer has $6.5 billion assets under management — which makes it a medium-sized player among Canadian money managers — and, with a third of its clients being charitable foundations and not-for profits, takes a conservative approach to investing.

When it assesses companies as investments, it looks primarily at profitability and management experience.

"Corporate governance isn't a short cut to identifying good, profitable, companies," Hamilton-Keen said.

Continuing poor corporate governance could be a symptom rather than the cause, she said, an indicator of a broader problem with managerial acumen. And in that case, "we generally vote with our selling feet. If we don't like the environment that the company's heading into or the direction that the management's taking the company, we'll sell the company."