Canada: Say-On-Pay Shareholder Voting

Copyright 2009, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Securities Regulation, June 2009

The push for a shareholder Say-on-Pay vote on the compensation practices of public companies has made in-roads in Canada and is likely to gain further momentum in 2010.

Say-on-Pay shareholder proposals were submitted for consideration at the most recent annual meetings of the major Canadian banks and as a result, in early 2009, Royal Bank of Canada, Bank of Montreal, Scotiabank, Canadian Imperial Bank of Commerce and The Toronto-Dominion Bank announced that they will give shareholders a Say-on-Pay vote in 2010.

To date, 11 large reporting issuers in Canada, including these banks, have announced that they will have a Say-on-Pay advisory vote in 2010.

Although a non-binding advisory vote – whereby shareholders approve the compensation, compensation policies or compensation disclosure of the company for the prior fiscal year – appears to be the predominant form of implementation of Say on-Pay votes in North America, there are other forms which the vote can take.


Say-on-Pay voting has already been implemented through legislation in the United Kingdom, Australia, the Netherlands, Sweden and Norway. The form in which a Say-on-Pay vote is implemented is dependent upon the answers to the following two questions:

  • Is the vote to be non-binding/advisory or binding?
  • What will shareholders vote on?

Advisory Vote on Compensation Disclosure

The legislation in the United Kingdom and Australia became effective in 2003 and 2005, respectively, and requires an annual non-binding advisory vote by shareholders. In both countries, the shareholders vote upon a remuneration report containing prescribed disclosure regarding the compensation of executives for the prior fiscal year.

Binding Vote on Future Compensation Policies

The Netherlands, Sweden and Norway introduced legislation effective in 2004, 2006 and 2007, respectively. The legislation in these countries requires a binding vote whereby shareholders approve the compensation policies or guidelines of the company and any changes thereto. The vote is on future policies rather than a retroactive look at policies implemented in the prior year. If shareholders vote against a new policy or changes to a previously implemented policy, the company can only rely upon past practices.


Voluntary Advisory Vote on Past Policies and Disclosure

In the United States, Say-on-Pay voting has been implemented voluntarily and by way of an advisory, non-binding vote. In 2008, Aflac Incorporated (Aflac) became the first company in the United States to adopt a Say-on-Pay vote. Aflac introduced a resolution which asked shareholders to approve:

  1. the overall executive compensation policies and procedures employed by the company, as described in the Compensation Discussion and Analysis of its Proxy Statement; and
  2. the tabular disclosure regarding named executive officer compensation in its Proxy Statement.

Aflac also indicated that its compensation committee would consider the outcome of the Say-on-Pay vote when determining future compensation arrangements. A similar approach to Say-on-Pay has also been adopted by, among others, Motorola Inc. and Verizon Communications Inc.


  • Eleven large reporting issuers in Canada have announced they will have a Say-on-Pay advisory vote in 2010
  • There are currently no Canadian legislation or securities commission proposals in respect of Say-on-Pay voting and, in the absence of any regulatory requirement, to the extent Say-on-Pay voting is implemented in Canada, it will continue to be either voluntary or in response to non-binding votes on shareholder proposals
  • Say-on-Pay voting has been voluntarily implemented in the United States by some public companies and is a requirement for recipients of the Troubled Asset Relief Program

Voluntary Advisory Vote on Past Compensation

MBIA Inc. in the United States also voluntarily implemented a Say-on-Pay vote but took a different approach and put forth two separate resolutions to shareholders. The first resolution asked shareholders to support the compensation awarded to the Chief Executive Officer and the second resolution asked shareholders to support the compensation awarded to other named executive officers as a whole.

Compulsory Advisory Vote

Following these voluntary adoptions of Say-on-Pay in the United States, legislation may not be far behind. In fact, as a senator in April 2008, Barrack Obama pressed the United States Congress to pass legislation that would require companies to have a non-binding shareholder vote on executive compensation. In February 2009, the Troubled Asset Relief Program (TARP) terms were amended to require a Say-on-Pay vote for any recipient of TARP funds during the period for which any obligation arising from such financial assistance remains outstanding. The TARP terms require that shareholders be given a non-binding vote on executive compensation, as disclosed pursuant to the compensation disclosure rules of the United States Securities and Exchange Commission.


There are currently no Canadian legislation or securities commissions proposals in respect of Say-on-Pay voting. In the absence of regulatory requirements, to the extent Say-on-Pay voting is implemented in Canada, it will continue to be either wholly voluntary by issuers or in response to non-binding votes on shareholder proposals.

To date, Canada has yet to see an actual Say-on-Pay vote, as reporting issuers have only addressed proposals to implement such a vote. The first actual votes will not occur until 2010.

Canadian shareholder proposals have frequently taken the form of an advisory Say-on-Pay vote to ratify the report of the compensation committee. However, that report is no longer required as a result of recent amendments to Form 51-102F6 – Statement of Executive Compensation of National Instrument 51-102 – Continuous Disclosure Obligations. Nor does the new Form 51-102F6 require a description of future plans for compensation. As a result, for reporting issuers who have indicated they will have a Say-on-Pay vote in 2010, it is unclear what shareholders will be asked to vote on and it is possible there may be a significant amount of variation amongst issuers in this regard.

In an April 2009 release, the Canadian Coalition for Good Governance (CCGG) recommended that all boards adopt a Say-on-Pay vote as a best practice. The CCGG advised that such vote should be an advisory shareholder resolution on (i) the report of the human resources or similar committee; (ii) the compensation plan; and (iii) the prior year's compensation awards. The CCGG has also indicated that it intends to produce a model form of Say-on-Pay policy and shareholder resolution. As noted above, under Form 51-102F6 there is neither a human resources committee report nor a compensation plan. Thus, to adopt the current CCGG proposal, issuers would be required to prepare both a compensation report and a compensation plan they otherwise are not required to prepare or disclose to shareholders, in addition to complying with the new Form 51-102F6.

RiskMetrics Group (RMG) (formerly ISS Shareholder Services), is a service organization which provides voting recommendations to its clients, predominantly institutional investors. If Say-on-Pay becomes more prevalent in Canada, RMG could become a dominant player in significantly influencing the compensation policies and practices of issuers, since observers estimate that its recommendations carry anywhere from 20% to 60% of the shareholder vote of companies whose proxy circulars they review. In its Canadian Corporate Governance Policy – 2009 Updates, dated November 25, 2008, RMG changed its "case-by-case" approach to shareholder proposals for an advisory Say-on-Pay vote and stated that it will generally recommend a vote in favour of such proposals. RMG also indicated that it will recommend against shareholder proposals for a binding vote on compensation.

As well, RMG published five "guiding global principles" that it will use in assessing compensation plans for its recommendations to its clients for a Say-on-Pay vote:

  1. Maintain appropriate pay-for-performance alignment with emphasis on long-term shareholder value: This principle encompasses overall executive pay practices, which must be designed to attract, retain and appropriately motivate the key employees who drive shareholder value creation over the long term. It will take into consideration, among other factors: the linkage between pay and performance; the mix between fixed and variable pay; performance goals; and equity-based plan costs.
  2. Avoid arrangements that risk "pay for failure": This principle addresses the use and appropriateness of long or indefinite contracts, excessive severance packages and guaranteed compensation.
  3. Maintain an independent and effective compensation committee: This principle promotes oversight of executive pay programs by directors with appropriate skills, knowledge, experience and a sound process for compensation decision-making (e.g., including access to independent expertise and advice when needed).
  4. Provide shareholders with clear, comprehensive compensation disclosures: This principle underscores the importance of informative and timely disclosures that enable shareholders to evaluate executive pay practices fully and fairly.
  5. Avoid inappropriate pay to non-executive directors: This principle recognizes the interests of shareholders in ensuring that compensation to outside directors does not compromise their independence and ability to make appropriate judgments in overseeing managers' pay and performance. At the market level, it may incorporate a variety of generally accepted best practices.

The question remains as to what effect, if any, a Say-on-Pay vote will have on compensation practices. It has been reported that, since implementation of advisory votes in the United Kingdom, only approximately eight remuneration reports have been rejected in the past six years. It has also been reported that in the Netherlands, where the vote is binding, most compensation policies get approximately 90% shareholder support. Not surprisingly, therefore, many observers are arguing that Say-on-Pay votes, whether advisory or binding, have little to no effect on compensation policies.

It is interesting to note, as a legal matter, that unlike directors, who are legally required to act with a view to the best interests of the company, and with due care and skill, shareholders as a matter of law are generally free to act completely with regard to their self-interest, including decisions as to how they vote their shares. Accordingly, in terms of their legal relationship to the company and other shareholders, a shareholder may vote in respect of a Say-on-Pay vote in any manner, for any reason, it wishes. It is not clear at this stage if or how shareholders will undertake the work to properly evaluate compensation disclosure or policies of all the issuers who adopt Say-on-Pay advisory votes. Large institutional shareholders may choose to either outsource this function (to service providers such as RMG) or do it internally, in either case increasing their costs, or they may choose to perform no analysis at all.

In deciding whether or not to implement a Say-on-Pay vote, companies will need to consider a number of different factors, including, among other things, the views of their shareholders, the presence or absence of a shareholder proposal and its level of support, industry practice, their purpose for implementing such a vote, their shareholder relations and the precise matters in respect of which the vote would be taken.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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