With current economic conditions and reports of executive compensation in the media, measures addressing executive compensation issues are drawing increasing attention. Several of these issues are discussed in another article. 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 its 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. 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, with the result that as of the end of April 2009, 12 of Canada's largest companies have agreed to give their shareholders a non-binding vote on executive compensation.
'Say on Pay' Outside of Canada
Since 2003, shareholder advisory 'say-on-pay' votes 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' votes. 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, non-binding '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 an advisory shareholder vote.
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.
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. 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.
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.' For a detailed consideration of these issues, please see our May 2009 Legal Update.
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.
