‘Say on pay’ gains momentum

Having said one year ago there is no need to push for “say-on-pay” resolutions because companies are improving executive compensation practices, the Canadian Coalition for Good Governance (CCGG) has changed its tune.

Representing the interests of institutional shareholders, the CCGG now says boards should voluntarily provide shareholders with an advisory vote at each annual general meeting.

This drive for “shareholder democracy” is part of a larger trend — 10 of Canada’s largest companies, including RBC, CIBC, PotashCorp, Bank of Montreal, Sun Life Financial and TD Bank Financial Group, have recently decided to allow shareholders to hold an annual vote on compensation as of 2010.

“TD promotes open and proactive dialogue with shareholders, ensuring their feedback on compensation and other important issues is heard and carefully considered by the board,” said John Thompson, chairman of the board of TD and a member of the management resources committee, in a release.

“It’s now clear from the votes held this year at the other major Canadian banks’ meetings that the opinion of the investment community, while still divided, has moved in favour of an advisory vote and so we’ve acted accordingly.”

In the United Kingdom, advisory votes have been proven to improve disclosure around executive compensation, said Laura O’Neill, director of law and policy at the Shareholder Association for Research and Education (SHARE) of Vancouver, which put forward the resolutions along with Meritas Mutual Funds of Cambridge, Ont.

“If they’re facing a vote, they feel they have to do a better job communicating what they’re doing is the right thing,” she said. “We really believe in the advisory vote as a catalyst for change.”

The non-binding aspect is important, said Al Hudec, a partner with the Vancouver-based law firm Farris.

“It creates transparency and dialogue but still respects the fact ultimate pay decisions are set by the compensation committee and compensation advisors.”

Change ‘not really necessary’

But Michael Thompson, a principal in Mercer’s human capital business in Toronto, said while it’s hard to ignore the huge public pressure on executive compensation practices, the CCGG’s 2008 position was the right one.

“The level of interest is disproportional to the issue. Shareholders don’t have a vote on whether the company’s strategy is appropriate. They don’t have a vote on whether or not the financing or risk strategy is appropriate. And both of those are far more material to the creation of shareholder value than the pay practices at the executive level,” he said.

“The say-on-pay thing is window dressing. It’s designed to make people feel better about the process. To the extent that it puts executive compensation matters front and centre, that’s not such a bad thing, but in practice it’s probably not really necessary.”

Shareholders already have a vote on directors to ensure they’re doing their jobs and Canada has good governance, said Thompson.

“We have well-educated boards, we have independent compensation committees, we have significantly enhanced and comprehensive disclosure of executive compensation practices, we have a sensitivity at the board level to these issues and much greater access between shareholders and the board on these issues than there ever has been,” he said.

On the other hand, an advisory vote could actually cause boards to make decisions that are more political and socially respectable than pragmatic, said Thompson.

“I think they’re trying to balance some incredibly complex issues that relate to the performance of the company, the performance of the individual, the competitive-pay marketplace, the market’s perceptions about how well they’re doing and why they’re doing it,” he said. “This additional scrutiny, in my mind, seems to be unwarranted.”

With the new disclosure rules released last fall by the Canadian Securities Administrators (CSA) — requiring a significant change to the information revealed in management information circulars around direct and indirect compensation for executive officers — coming into effect, shareholders are more comfortable they’ll find what they need to reasonably comment on compensation structures, said Stephen Griggs, Toronto-based executive director of the CCGG. And a say-on-pay resolution in isolation doesn’t tell a board very much, he said.

“It’s a very blunt instrument and we feel it’s much more important to focus on shareholders talking to boards and boards talking to shareholders to understand the concerns of shareholders around executive compensation, with say on pay at the end of the cycle.”

Individual voting also pushed

Since some companies still refuse to adopt CCGG’s best practices or recognize shareholders have a legitimate right to “meaningful” director elections and participation in the decision-making process, the coalition is also pushing for the CSA to mandate individual voting for nominee directors (instead of a “slate” of directors).

“Individual voting is a fundamental shareholder democracy issue and I can’t see how any director with a straight face would honestly say shareholders shouldn’t have the right to vote against each individual director,” said Griggs. “How can you put a decision to adopt shareholder democracy or not in the hands of the people who have every incentive to oppose it?”

However, individual voting “gives the teeth to say on pay,” said Hudec, and while transparency and accountability are good things, shareholders should not have undue influence over the long-term decisions of a board.

“A combination of the two… would give shareholders inordinate say over compensation decisions by allowing them to target individual investors. With all the head spins in the market, it’s dangerous to give too much say on these things to shareholders because a lot of shareholders are very short-term, opportunistic in their thinking and objectives.”

Whatever the impact of say on pay, HR will have a big role to play, particularly around the disclosure requirements, said Thompson. It will have to ensure HR programs and policies are aligned with the needs of the business, the programs are being applied as intended and the plans are communicated internally and externally in a way that is understood.

“HR will play an even bigger role on disclosure than they have in the past,” he said. “While the compensation committee’s board is accountable for making decisions about the compensation practices for the executive group, the overall plan design, at least the structure, is probably going to be cascaded down the organization, so HR will play an active role in ensuring that design makes sense.”