‘Say-on-pay’ rules unnecessary: CCGG

Coalition says Canadian companies improving executive compensation practices

Companies are clearly making strides to improve executive compensation practices so there is no need to push for “say-on-pay” resolutions, for now, according to the Canadian Coalition for Good Governance (CCGG), which recently released a position paper on the topic.

“It was widely discussed and unanimous in the end that this was not something that should be legislated or mandated, nor would we support it unilaterally,” said David Beatty, managing director of the Toronto-based CCGG, which has 49 institutional investors as members.

“We may revise that later on, when disclosure is out and mature. People who get vast amounts on a single-trigger severance and then get rehired in the next minute, if our members are shareholders of those companies, those chairs and directors will certainly hear from the individual members. So we’re not abrogating the field and saying ‘pay what you like’ but (we’re saying) ‘we don’t want to second-guess you, we know you work hard at it.’”

The group says companies are addressing disclosure issues and improving shareholder involvement so it will not recommend regulatory change that mandates advisory shareholder votes (a non-binding resolution at an annual general meeting to “comment upon” executive compensation) on compensation reports for Canadian issuers. It is also not recommending universal support for any say-on-pay resolutions brought forward in the 2008 proxy season.

Instead, the coalition said it will continue to work with boards and compensation committees to explain the shareholder perspective on compensation practices and disclosure.

“This is perhaps the most difficult board job that’s ongoing — the setting of appropriate compensation schedules for senior managers,” said Beatty. “Without complete disclosure of what they actually thought or do, it’s impossible for a third-party, ex-post, to really have an intelligent point of view, except when the thing goes way out of bounds. We don’t think the institutional shareholders feel they have enough confidence in the disclosure and their own capabilities to second-guess a board, and they don’t want to do that anyhow — that’s why we elect directors, to make these difficult determinations.”

The coalition says the United Kingdom and Australia have recently adopted regulations that require a non-binding vote on a company’s remuneration report while in the Netherlands, Sweden, Norway, Spain (in 2008) and France (in 2009) the vote is binding. In North America, support is greatest for an advisory vote on executive compensation, says the CCGG, and in 2007, shareholder resolutions calling for the adoption of an advisory vote were initiated for more than 60 companies in the United States.

Say-on-pay shareholder proposals are expected to be included on the ballots of a number of Canadian companies in the upcoming 2008 proxy season.

The CCGG says more companies are adopting majority voting for director elections — allowing shareholders to express their concerns by withholding votes. In addition, new requirements for compensation disclosure will likely take effect in 2009 and have a significant impact while executive compensation advisors are taking a greater role and are increasingly independent.

There’s still a long way to go and it’s a very tricky area, said Beatty, but by and large disclosures are getting better.

“There’s a lot of pressure (to get) pay packages more closely linked to performances and (to get) the numbers to be somewhat reasonable,” he said.

Going forward the CCGG say it is seeking less complexity in compensation packages and better disclosure and justification of post-retirement benefits and change-of-control provisions for executives. It will also continue to discourage the practice of slate voting (for a group of directors together) and to adopt a majority requirement for director elections.

“It’ll be a 10-year march to get anything entrenched in the law but that would certainly be a desired outcome for my great-grandchildren,” said Beatty. “It has been pretty widely adopted which gives us confidence in fact that boards are thinking about it themselves and their responsibilities to shareholders.”

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