An Emerging Issue – "Say on Pay" Votes
The concept of "Say on Pay" votes refers to a non-binding shareholder vote enabling the shareholders to comment on the executive pay packages.
Several institutional investors have been looking at executive pay packages and have voiced their concerns in this regard. Recently, the Canadian Coalition for Good Governance (CCGG) issued a press release accompanying a study stating that it will not recommend the implementation of mandatory advisory shareholder votes on executive compensation for 2008.
"Say on Pay" votes have gained support in the United States from investor advocates, union pension funds and shareholder groups who have put pressure on major companies to include such a vote in their agenda for their annual general meetings. The CCGG study mentions that currently, over 60 companies have adopted "Say on Pay" votes in the United States.
The U.K. and Australia have adopted regulations requiring "Say on Pay" votes. Other European countries like The Netherlands, Sweden, Norway, Spain and France have adopted a different twist to the "Say on Pay" votes. In these countries, the vote is binding.
The CCGG has preferred not to push forward for mandatory "Say on Pay" votes in Canada at the present time considering an overall improvement in the disclosure of executive compensation in companies' circular, the increasing role of independent executive compensation advisors and the introduction of new regulatory requirements for compensation disclosure. Also, the CCGG mentions that "it is the role of the board, and in particular the compensation committee, to establish appropriate executive compensation plans that clearly align the interests of shareholders and management".
The continued adoption of majority voting for the election of directors would also explain the reason behind the CCGG's decision not to support "Say on Pay" votes. Effectively, the CCGG is leading the way towards the elimination of slate voting in the context of the election of directors at annual meetings in favour of the adoption of majority voting for each director.
More Companies Decide to Adopt Majority Voting
An increasing number of companies have adopted modified majority voting policies in recent years. The Globe and Mail reported in early January that more than 80 major Canadian companies adopted a modified majority voting system for the election of their directors at annual meetings.1 This follows the recommendation made by the CCGG in 2006 to replace traditional North American plurality voting with modified majority voting.2
Plurality voting, which consists of presenting a slate of nominees, has traditionally been the mode for the election of directors at Canadian companies' annual meetings. Since Canadian corporate laws do not allow shareholders to vote against a certain nominee director, they have therefore had two options: (1) to vote "for" the proposed slate; or (2) to withhold their vote from all the nominees at the same time. The slate must then only receive a single "for" vote in order for all the nominees to be elected and this, despite the number of votes that were withheld.
Modified Majority Voting
The CCGG has proposed the following structure to be implemented by Canadian public companies:
- Elections to be done by ballot rather than by show of
- Individual nominees are each included in the
company's form of proxy.
- Shareholders may vote "for" or withhold their
votes from individual nominees.
- Votes that are withheld are considered votes against the
individual nominee. Consequently, if a nominee receives more
"withheld" votes than "for" votes, he
will still be elected pursuant to the by-laws of the company.
However, he will be required to submit his resignation to the
board of directors that have just been elected. The CCGG
finds that he would not be considered having the confidence
of the shareholders.
- The newly elected board will then have to decide whether
or not to accept the resignation as soon as possible but in
any event, no later than 90 days after the resignation. The
CCGG supports relying on the board's discretion in
order to determine the company's best interests. The
CCGG feels that such decision by the board to accept or
reject a resignation should be made public by the
- Should the board accept the resignation, it would have a
few options: (1) it could choose not to fill the vacancy on
the board of directors until the next annual meeting; (2) it
could appoint a new director whom it considers to merit the
confidence of the shareholders in accordance with the
applicable corporate law; or (3) it could call a special
meeting of shareholders at which the new board (or perhaps a
shareholder or shareholders) would present a new candidate or
new candidates to fill the vacancy or vacancies.
- Modified majority voting system will usually be
implemented by companies through the adoption of an internal
policy that states the procedure described above.
1 "No need for "say on pay" votes, investor group says, The Globe and Mail, January 7, 2008.
2 Canadian Coalition for Good Governance, Best Practices in Shareholder Communication 2007: http://www.ccgg.ca/best-practices/director-disclosure/.
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