With current economic conditions and reports of executive compensation in the media, measures addressing executive compensation issues are drawing increasing attention. One measure that has received considerable press in Canada and the United States, and is being implemented by some companies, is 'say on pay,' an annual shareholder advisory vote on a company's compensation practices.
'Say On Pay' In Canada
Under Canadian corporate law, how much a company pays its executives is within the exclusive authority of the board of directors. Canadian securities laws require extensive disclosure of how much has been paid to a public company's top executives and the basis upon which that compensation has been calculated, but shareholders do not have any direct input into the process, nor do they have any right to approve or disapprove. As with other decisions that may be taken by a board, shareholders who object to a company's executive compensation practices may seek to change the directors, make a shareholder proposal to express their views, or assert a breach of the directors' fiduciary duties.
Over the past few years, various shareholder proposals have been made to seek a shareholder vote on executive compensation; typically these proposals have been made to the largest of Canadian public companies. While the early proposals garnered little support, over time more institutional shareholders have been supportive, with the result that as of the date of this update, 12 of Canada's largest companies have agreed ― either voluntarily or as the result of a successful shareholder proposal ― to give their shareholders a non-binding vote on executive compensation. The Canadian Coalition for Good Governance (CCGG) has reflected this evolution in support, having recently suggested that 'say-on-pay' votes be adopted in respect a company's human resources or similar committee, its compensation plan, and the prior year's executive compensation awards.
'Say On Pay' Outside Of Canada
Since 2003, shareholder votes on 'say on pay' have been mandatory in the United Kingdom. Australia and some European countries have also had legislation in place requiring shareholder votes on executive compensation for a number of years.
Starting in 2007, the United States has seen a steady increase in support for 'say on pay.' This has been reflected in the press, in the United States Congress, and in the number of shareholder proposals being made. Indeed, in a significant number of recent shareholder meetings, 'say-on-pay' proposals have received substantial support and have been approved in many instances. In February of this year, in response to public pressure, issuers receiving financial assistance from the Troubled Asset Relief Program (TARP) were required to put their executive compensation to a shareholder vote. Some commentators see this as a precursor to an eventual legislative requirement in the United States that 'say-on-pay' votes be held by all United States public companies.
Is 'Say On Pay' A Reality For Canadian Companies?
While a dozen large Canadian public companies have agreed to give their shareholders a 'say on pay,' the concept has not yet been more widely adopted in Canada. As a result, a relatively small number of companies have turned their attention on this subject to questions of implementation. Other Canadian public companies, however, may be considering the question, and may offer their shareholders a 'say on pay.' Still others may not be giving the matter a great deal of attention.
This difference reflects the realities of the Canadian capital markets. These markets are characterized by a number of companies with significant or controlling shareholders, a relatively small number of widely held larger issuers, and a significant number of venture and smaller issuers. These factors make Canada's public company landscape different from those in the United Kingdom and the United States, and therefore the inevitability of Canadian public companies universally adopting 'say-on-pay' votes in the absence of mandatory legislation is not clear. What is clear, however, is that at present Canadian public companies generally fall into one of three categories with respect to their consideration of 'say on pay':
- larger issuers that have already adopted 'say on pay';
- issuers that have not adopted 'say on pay,' but are debating whether to do so; and
- issuers that have not implemented 'say on pay,' and will likely not do so.
1. Larger Issuers That Have Already Adopted 'Say On Pay'
For those large companies that will provide an advisory vote on executive compensation, the focus has shifted from a debate of the merits of 'say on pay' to questions of how to implement such a vote. In implementing 'say on pay,' these issuers will be considering a number of issues, including:
- What precisely will shareholders be asked to consider? Will the vote be to approve the entire compensation portion of the proxy circular? Merely the CD&A? Just the CEO's compensation?
- Will companies consult with shareholders on the resolution to be proposed or merely advise shareholders of the wording to be put before them?
- To what extent will significant shareholders be engaged in advance on compensation plans?
- Will Compensation Committees use consultants to a greater extent or differently?
- How does the vote affect the Board and the Compensation Committee? How will the vote affect their role and processes?
- How will the prospect of a vote change the content of the compensation disclosure in the proxy circular? How are the complexities of numerous different plans to be communicated for judgment in a simple "approve / disapprove" vote?
- Perhaps most difficult will be interpreting the results of the vote. If the vote is negative, companies may have difficulty understanding precisely why.
2. Issuers That Have Not Adopted 'Say On Pay' But Are Debating Whether To Do So
Companies with larger market caps and institutional shareholders are likely considering a 'say-on-pay' vote, particularly in light of the adoption of 'say-on-pay' votes by large financial institutions and other large issuers. These companies are likely considering, among other things:
- The size and nature of the company and its relationship with its shareholders. Are its shareholders demanding a 'say on pay'?
- How a 'say on pay' may affect the communication of the company's current compensation plans. If these plans are complex, how can that complexity and the relationship between the compensation plans and achieving corporate strategies be communicated to shareholders for a simple "yes / no" vote?
- How might a 'say-on-pay' vote affect the accountability of directors to ensure that compensation programs are aligned with corporate objectives (such as attracting and retaining talent, and paying for performance)? Will directors in any way feel, or be, less accountable for these decisions?
- Previous or possible media attention related to their company's executive compensation.
If issuers currently considering adopting a 'say-on-pay' vote do so voluntarily, or as a result of successful shareholder proposals, they will then need to consider the implementation issues noted above.
3. Issuers That Have Not Implemented 'Say On Pay' And Will Likely Not Do So
For many companies in the Canadian capital markets, 'say on pay' may not be a significant issue. Many Canadian issuers have a controlling shareholder, do not have large or controversial compensation packages, or lack media scrutiny. For a company with a controlling shareholder, for example, the result of the 'say-on-pay' vote would be determined by the controlling shareholder, and as a result may be considered duplicative and inefficient. While some shareholders may propose a vote of the minority shareholders in such circumstances, this would add both a further level of complexity to the voting process as well as further complications for the board of directors in interpreting the results of the vote. Similarly, smaller issuers may have straightforward, non-controversial compensation plans, and may place a higher priority on financial considerations and day-to-day business concerns than on 'say on pay.' These companies will need to consider all of the issues noted above, as they consider whether they should adopt 'say on pay.'
Several larger financial institutions in Canada have adopted an advisory vote on executive compensation. Although 'say on pay' has received increased media attention, 'say-on-pay' advisory votes are not yet required in Canada. Many of the market considerations that affect United States and United Kingdom companies are not the same as those of many Canadian companies. In addition, despite the strong push for a legislated requirement in the United States, there does not appear to be the same drive for legislation here in Canada, although there is a growing interest. While 'say on pay' is clearly becoming part of the Canadian public company landscape, many companies will still need to consider whether this vote is appropriate for them and their shareholders. There are serious issues to be considered by many Canadian public companies before they join the list of those whose shareholder meetings will include a 'say on pay.'
* The authors would like to thank Jennifer McGoey, an articling student with the firm, for her excellent assistance.
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