‘Say on pay’ garners favourable results

Pay vote extended to non-financial institutions

With a vote of 99.2 per cent, shareholders at Laurentian Bank overwhelmingly endorsed the bank’s executive compensation on March 16. The advisory or “say on pay” vote — a first for Laurentian — was non-binding, so the board of directors could take the results into account during deliberations on further modifications to policies, procedures or decisions concerning executive compensation.

“Nothing on the other side led us to think that there would be some shareholders that had concern with our program,” said Gladys Caron, vice-president of communications and investor relations at Laurentian in Montreal.

And the Mouvement de défense et d’éducation des actionnaires (MÉDAC), which represents shareholder interests, had recommended shareholders vote in favour of Laurentian’s approach, she said.

“This organization thinks that our programs, not only this year but in the past, have always been reasonable and in respect of shareholders, management and the bank’s interests,” said Caron.

The results of the votes at Laurentian and other banks that held similar votes in 2010 — such as 92.9 per cent at Canadian Imperial Bank of Commerce, 91.1 per cent at Royal Bank of Canada and 89.2 per cent at Bank of Montreal — are a bit surprising, said Laura O’Neill, director of law and policy at the Shareholder Association for Research and Education (SHARE) in Vancouver.

But if opposition stays “tucked in under five per cent,” it suggests say on pay is working as effectively as hoped, she said.

And while the vote is non-binding, companies should still take the input seriously.

“Companies would disregard a heavy vote against at their peril,” said O’Neill.

Ninety per cent in favour still means there’s eight to 10 per cent of shareholders who think there’s something significant enough needing change that they voted against, said Gary Hawton, CEO of Meritas Mutual Funds in Montreal.

“Now the challenge to the board is to solicit that information.”

All of Canada’s financial institutions are holding such a vote this year, largely in response to requests from groups such as Meritas and SHARE, and that list is expanding to non-financial institutions such as Enbridge, Suncor Energy, TransAlta and Canadian Pacific Railway.

However, no companies have agreed to the vote without a request for dialogue from Meritas, said Hawton.

“I’m frankly disappointed with the board and directors on the whole in Canada. Nobody has stepped up and said, ‘This is good governance… and we should voluntarily be adopting this.’ I am absolutely amazed that’s not yet happened.”

Hopefully with the high votes, companies will be less fearful of offering an advisory vote, said O’Neill.

“We’re hoping over time resistance will decrease,” she said.

However, the Institute for Governance of Private and Public Organizations (IGPPO) recently released a position paper stating these consultative votes should not be imposed on all Canadian corporations, just in specific cases of unsatisfactory compensation practices.

“If corporate boards cannot be trusted to make the right decision on executive compensation, how can shareholders rely on their judgment for other equally important decisions?” said Yvan Allaire, chairman of the IGPPO.

But shareholders are not trying to take away the board’s power, said Hawton.

“It’s a consultative process that we hope and we think that most issuers have seen as an on-the-same-side-of-the-table process, not confrontational. We’re not airing dirty laundry, we’re not pointing fingers, we’re saying, ‘You’re a governance leader within your industry and now it’s time to acknowledge that governance is evolving, let’s move forward on this together.’”

Canadian companies still have work to do when it comes to disclosure but there was a marked improvement with the banks this year, said O’Neill. They are getting rid of really confusing elements of the pay package that added complexity, perhaps without a great amount of value.

“We’re still seeing some not very good work around performance goals or short-term incentives but it’s better and overall there seems to have been a real effort made either through a letter to shareholders or the compensation analysis,” she said. “We attribute some of that at least to the fact there was a vote.”

With the intensified focus on executive compensation, Laurentian’s compensation committee has devoted more time to the issue, said Caron.

“This year, it looked (at it) in a different way, to make sure everything we had in place, was really, to our knowledge and judgment, the best program we could have,” she said.

Prior to the vote, Laurentian made changes to its circular as required by newer regulations, with greater detail and different ways of presenting the information, said Caron.

The compensation discussion and analysis provided a complete overview of the executive compensation, along with outlining the objectives sanctioned by the board of directors. It detailed, for example, how Réjean Robitaille, president and CEO of Laurentian, earned a base salary of $550,000 and short-term incentive compensation of $352,000 while the bank reported net income of $113.1 million.

“Under the direction of Mr. Robitaille, the bank continued to deliver a solid performance in 2009,” said the analysis.

Shareholders are voting on the structure of the compensation package, not the levels, but this leads to the amounts, said Caron. For example, managers at Laurentian who receive bonuses are only able to cash the whole amount three years after the year they were awarded, if the company has reached a performance objective.

“So it both rewards the past for what they generated in terms of profitability and efficiency but also takes into account the fact that they should continue to manage the bank profitably,” she said. “So this is one element, I think, that was positively received by the shareholders.”

In anticipation of say-on-pay votes, compensation plans have been revised to have compensation vest over longer periods of time, said Hawton.

“We’re seeing greater scrutiny on risk and short-, mid- and long-term risk because there was a perception before that, and in some cases it may be a reality, that as long as you can produce short-term numbers, we’ll give you a massive pay package based on that. But there wasn’t necessarily a full view of, ‘Is the income that we generated this quarter sustainable and is it income that may blow up and cost us even more sometime later?’”

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