Recent high-profile corporate insolvencies and bailouts, particularly in the United States, have drawn international attention to the executive compensation practices of publicly traded companies. While shareholder activists have been demanding for several years the right to an advisory shareholder vote, or say on pay, on the executive compensation programs, this movement recently has been successful in achieving binding or non-binding say-on-pay votes for public companies in the United Kingdom, Australia, the Netherlands, Norway, Spain, France and Sweden.
Proponents of say on pay argue that such a mechanism will help curtail compensation practices that reward excessive risk taking and will better align executive and shareholder interests. Detractors question whether shareholders understand all of the facets of executive compensation and maintain that shareholder views will shackle a board's ability to attract and retain top talent. At least for now, say on pay is gaining traction in several countries.
In the United States, concerns over executive compensation levels and practices were manifested in the Interim Final Rule released by the U.S. Department of the Treasury in July 2009, implementing the executive compensation and corporate standards under the American Recovery and Reinvestment Act of 2009. The Interim Final Rule applies to certain companies that received funds under the Troubled Asset Relief Program (TARP), requiring, among other things, that certain TARP recipients provide for a say-on-pay process that includes a non-binding shareholder advisory vote on executive compensation packages. In addition, in July 2009 the U.S. Department of Treasury submitted a legislative proposal to Congress that would authorize the U.S. Securities Exchange Commission to require, among other things, that all companies listed on a U.S. national securities exchange submit non-binding resolutions to shareholders with respect to the approval or disapproval of executive compensation, the compensation decisions of boards of directors and golden parachute compensation arrangements disclosed in proxy solicitation materials. Although this proposal has not yet been passed as legislation, an increasing number of senior U.S. companies have voluntarily implemented advisory votes on say on pay.
In Canada, the say-on-pay movement has been more muted and has not to date resulted in any proposed legislation to mandate advisory votes on executive compensation levels or practices. Under Canadian law, a board of directors retains the unfettered authority to set executive compensation. Nevertheless, Canadian institutional investors and corporate governance groups are beginning to press for the voluntary adoption of say-on-pay practices.
In January 2010, the Canadian Coalition for Good Governance (CCGG) released a suggested model board policy on shareholder engagement and say on pay. While the proposals of the CCGG are not legislation, Canadian companies should nevertheless be aware of these views, as they influence, and in some cases direct, the votes of significant Canadian institutional shareholders.
The CCGG model policy recommends that a board “develop practices to increase engagement with all of its shareholders as is appropriate for its shareholder base and size”. Such practices could take the form of surveys, town halls, meetings with significant shareholders or specific questions posed as part of the proxy solicitation process.
The model policy also addresses disclosure of compensation practices by recommending that, in addition to the disclosure required by securities legislation, a committee of the board report to shareholders on “the key strategic objectives of the company and how the executive compensation plan is designed to motivate management to achieve them”. While securities laws focus executive compensation disclosure on describing historic practices and results, the CCGG model policy would also require that the company describe its compensation plan for subsequent financial years and describe any changes in that plan relative to prior years.
Perhaps most significantly, the model policy requires companies to voluntarily add to each annual meeting a shareholder advisory vote on the company's report on executive compensation. To facilitate a comparison amongst the practices of different companies, the CCGG recommends that companies adhere as closely as possible to the CCGG recommended form of shareholder resolution.
The outcome of an advisory vote conducted in accordance with the CCGG model policy is non-binding. As a result, a negative vote does not mandate the adjustment of executive compensation practices and a positive vote should not be considered as reducing or otherwise releasing a board of its responsibility and accountability for compensation practices. However, the model policy directs the board to take into account the results of say-on-pay votes in the future consideration of compensation practices. The CCGG model policy would also impose upon companies an obligation to disclose the results of the say-on-pay vote in its report on voting results for the meeting.
Notably, in releasing its model policy, the CCGG stated that institutional shareholders should consider each company's compensation practices on their own merits and not adopt a check-the-box approach to say-on-pay votes. Although the CCGG did not elaborate, the comment is presumably to discourage institutional shareholders from having their votes directed by an internal checklist of say-on-pay menu items, instead encouraging them to consider on an individual basis whether a company's compensation practices are appropriate for its circumstances.
The CCGG expects that where a say-on-pay vote indicates significant opposition to a company's current compensation practices, the company should undertake an active dialogue with its shareholder base, particularly any shareholders known to have voted against the resolution, with a view to ascertaining shareholder concerns. Shareholder opinion would receive a further voice under the CCGG policy through the board being required to disclose to shareholders as soon as is practicable, and no later than in the management proxy circular for its next annual meeting, a summary of the comments received from shareholders and the changes to the compensation plans made or to be made by the board or explain why no changes will be made.
While Canadian public companies are not legally required to provide shareholders with an advisory vote on executive compensation, recent developments in the U.S. and the recommendations put forth by the CCGG may place additional pressure on companies to voluntarily adopt a best practices approach to shareholder say on pay. To date, more than a dozen large Canadian public companies have voluntarily adopted some form of say on pay, or announced an intention to do so, including Canadian Imperial Bank of Commerce, Royal Bank of Canada, the Bank of Nova Scotia, Bank of Montreal, National Bank, the Toronto-Dominion Bank, the TMX Group, TELUS Corporation, Sun Life Financial, Manulife Financial Corporation, Industrial Alliance and Potash Corporation of Saskatchewan. Further, if the momentum of say-on-pay initiatives in the U.S. continues, the possibility remains that Canada may follow by legislating say on pay in some form.