Collaboration helps ‘say-on-pay’ movement

13 financial institutions agree to same resolution policy

With 13 major financial institutions in Canada agreeing to use the same policy when it comes to shareholder advisory votes, the “say-on-pay” movement continues to gain steam. And a recent report from the United Kingdom, which adopted the say-on-pay approach six years ago, suggests the effect will be largely positive for Canada.

A model say-on-pay policy was presented by the Canadian Coalition for Good Governance (CCGG) at the end of October and, thus far, companies such as CIBC, the Bank of Montreal, the Bank of Nova Scotia, Royal Bank of Canada, TD Bank, Sun Life Financial and Manulife Financial have come together and agreed on the direction of the policy.

“We decided it would be in all of our shareholders’ interest if we actually had a common resolution,” said Deborah Alexander, executive vice-president, general counsel and secretary at the Bank of Nova Scotia in Toronto. “The true motivation was to try and make it a level playing field, so that if you are a shareholder at some of the banks and insurance companies, when you went to vote on that resolution, you were voting on the same standard for each.”

The CCGG policy is meant to provide boards with greater guidance in a couple of areas, said Stephen Griggs, the coalition’s executive director in Toronto, adding all the companies might not agree with every word but generally agree with the approach and direction.

“This was not about putting caps on compensation or mandating any particular form of compensation structure. It’s about ‘Are the boards thinking about the right things and going down the right path?’” said Griggs.

The goal is to achieve a consensus in Canada, at least within the boardrooms, that engagement with shareholders is a good idea and come up with a list of questions to ask that all companies can use, he said.

“It’s logistically a nightmare if you have hundreds of different questions beings asked,” said Griggs.

Often there is a communication gap, so it can be difficult to discern, through publicly released plans and reports, how a company is using compensation as a tool to drive management to achieve distinct corporate objectives, he said.

“But when you sit in the boardroom and you talk to the chair of the board and chair of the compensation committee, in most cases you find they have a very good idea of what they are doing,” said Griggs. And companies should be prepared for the reality a significant number of shareholders may be unhappy, he said.

U.K. report looks positive

The U.K. report Say on Pay: Six Years On, from Railpen Investments and Pensions Investment Research Consultants, lists several benefits to say on pay. For one, the discipline of going through the annual vote process, both for companies and investors, is a valuable one. It enriches investor understanding around compensation and corporate governance risk analysis and has enhanced the role of the compensation committee, said the report. Say on pay has also made for more sophisticated debate and greater transparency.

And many companies have used the vote as an opportunity since most “do not have egregious pay practices and have a good story to tell in terms of their remuneration practices,” said the report.

In the U.K., the regulations aren’t really comprehensive but are more instructive, said Laura O’Neill, director of law and policy at the Shareholder Association for Research and Education (SHARE) in Vancouver, which worked with the CCGG in forming the policy. In Canada, the CCGG has gone further by incorporating things such as feedback around a negative vote, which is just starting to be considered in those countries, she said.

“The increase in dialogue has really been a big plus,” she said. “It’s not about bashing down pay, necessarily, it’s about getting that conversation to a higher level and getting it to be more inclusive.”

The Canadian experience should be similar to the U.K., with a much greater level of conversation, particularly between large shareholders and boards, said Griggs.

“Our perspectives on certain issues have changed because of meeting with a number of directors and understanding exactly what it is they deal with and why they do things,” he said.

“A lot of this is a lack of ­communication. It’s not anybody’s fault, it’s just kind of the way the world evolved. It wasn’t that long ago that investors paid very little attention to compensation.”

In looking at voting trends through the years, Say on Pay found there has been an increased focus on the disclosure and “challenging” nature of targets and a growing intolerance towards one-off awards and severance payment levels. It also showed the pay for performance culture has strengthened, “rewards for failure” are significantly reduced and, despite the advisory votes, pay levels continue to rise.

Canada is starting out from a different position, said Carol Hansell, a senior partner in Toronto at Davies Ward Phillips & Vineberg, who was involved with the consultations.

“The extreme pay scales that have existed in other parts in the world have never existed here and so there is less of a drive for change in the specifics of many packages.”

Canada will most likely see changes to the structural aspects of pay, including pensions and severance, said O’Neill, and it’s possible there will continue to be high votes on “lousy” stock option plans. But there tends to be a hesitancy around the quantum question — how much is too much?

“We’ll have to wait and see whether quantum becomes an issue. It certainly has eluded the vote in the other jurisdictions where it’s operating,” she said.

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