On October 22, 2009, the Canadian Coalition for Good Governance (CCGG) released its draft "Model Say-on-Pay Policy for Boards of Directors." This draft follows and builds upon the CCGG's "Shareholder Engagement and Say-on-Pay Policy," which was released in April 2009 (see our discussion of this in our August 2009 issue). The Model Policy is intended to support the CCGG's goal of encouraging greater engagement and accountability by boards of public companies in Canada with and to their shareholder-owners.
The CCGG is a coalition of 41 of Canada's leading institutional shareholders, which collectively manage in excess of $1.4 trillion of assets. Since its founding, the CCGG has been at the forefront of efforts to promote and improve good corporate governance practices in Canadian public companies. During 2009, the CCGG sharpened its focus on ways that institutional shareholders might engage directly with the boards of directors of the companies in which they are invested, as a tool to achieve improved governance of those companies as well as accountability of the members of the boards of those companies to their owners. This approach reflects the recognition that members of the CCGG are long-term investors who cannot choose to sell the shares of Canadian public companies simply because the companies' governance practices are not acceptable to them.
Public companies in the United Kingdom and Australia have had mandatory say-on-pay advisory votes for some years, and this practice has steadily been gaining attention in Canada. At annual shareholder meetings in the spring of 2009, shareholders of a number of Canada's largest banks and insurance companies approved shareholder proposals calling for a say-on-pay advisory vote at their next annual meetings; boards of several other large Canadian public companies voluntarily followed suit, with the result that shareholders of at least 13 large Canadian public companies will have say-on-pay votes at their next annual meetings.
In the CCGG's "Shareholder Engagement and Say-on-Pay Policy," the CCGG explicitly linked say-on-pay shareholder advisory votes with its objective of encouraging direct engagement between shareholders and the boards of the companies in which they are invested. Say-on-pay votes were presented as an important part of this "engagement process," giving shareholders an opportunity to express directly to the board their satisfaction with the board's approach to executive compensation.
Following these developments, in July 2009 the CCGG released a policy on "Board Engagement," in which it indicated that it would be reaching out to a number of large Canadian public companies to meet with their board and compensation committee chairs. These meetings are intended to establish a dialogue with the companies on their governance practices generally, and their executive compensation strategies in particular.
With its draft Model Policy, the CCGG has completed the evolution of its current approach to shareholder engagement and say-on-pay advisory shareholder votes. While the Model Policy has been released as a policy directed towards say-on-pay advisory shareholder votes, it explicitly recognizes that such votes are part of an "ongoing integrated engagement process between shareholders and boards." The Model Policy is intended to give investors and boards of public companies in Canada guidance on how an advisory vote by shareholders on executive compensation practices can be part of the shareholder engagement process encouraged by the CCGG.
The CCGG recommends that boards voluntarily adopt the Model Policy, or some substantially similar variant of it, appropriate to their particular circumstances. By adopting the Model Policy, boards would be in effect declaring that they believe regular engagement between shareholders and members of the board — without management's presence — should occur. This engagement would be intended to provide shareholders with an opportunity to discuss governance issues directly with members of the board. The Model Policy notes that these discussions would be subject to the obligations not to make selective disclosure of material undisclosed information; as a result, they would provide an opportunity for boards to listen directly to their shareholders and to explain to them otherwise publicly available information.
Boards would be expected to develop engagement practices appropriate to the shareholder base of the company; meeting with large shareholders or their organizations (such as the members of CCGG and the CCGG itself) would be the easiest method, but boards would have to establish methods of engaging with smaller shareholders. The Model Policy notes that boards might consider emerging shareholder engagement practices in the US and Europe, including 'town hall' meetings, investor surveys, asking specific questions in the proxy process, undertaking investor surveys and using Web-based tools.
The Model Policy would also require that the executive compensation disclosure contained in the management information circular be a report to shareholders from the compensation committee of the board on behalf of the board; this is not a requirement of the securities regulatory instrument (NI51-102F6). The Model Policy states that the compensation disclosure provided to shareholders should be "complete, clear and understandable," and that "sufficient detail will be given to shareholders to assist them in forming a reasoned judgment about the company's approach to compensation." The committee's report to shareholders should clearly state the key strategic objectives of the company, and discuss how the compensation policies are designed to motivate management to achieve those objectives in order to enable shareholders to understand the goals the board is trying to achieve with its compensation policies and to understand the rationale for the compensation awards and arrangements — which, in turn, will facilitate shareholder input that may be meaningful and helpful to the board.
While compensation disclosure primarily relates to the most recently completed financial year, the Model Policy states that this disclosure should also describe the board's approach to compensation in the current year, noting any changes made from the prior year as well as disclosing instances where discretion was exercised by the board in the prior year. Under the Model Policy, executive compensation disclosure would go beyond what is required under the disclosure form prescribed by securities law.
Recommended Form of Advisory Resolution
The CCGG has prepared a recommended form of the say-on-pay shareholder advisory resolution, which has been published as part of the Model Policy. The CCGG recommends that all issuers proposing a say-on-pay advisory resolution to their shareholders use the recommended form of resolution as closely as possible, in order to have consistency among issuers. The recommended form of resolution is:
Approval of the resolution would require an affirmative vote of a simple majority of the votes cast at the annual meeting of shareholders.
Results of Advisory Vote
The Model Policy stipulates that the results of the shareholder advisory vote be released as part of the report on vote results for the meeting. As an advisory, non-binding resolution, the results of the vote should be taken into account by the board of the company when considering future compensation policies. The CCGG notes that if a significant number of shareholders oppose the resolution, then the board should consult with shareholders — in particular those who are known to have voted against the policy — to understand their views, and should review the company's approach to compensation in the context of those concerns. Following these further consultations, the board should disclose to shareholders a summary of the comments received from shareholders in the engagement process, as well as any changes to be made to the compensation practices of the company, or why no changes will be made.
Issues Raised by the Model Policy
The Model Policy is a careful and thoughtful advance in the CCGG's thinking; it results from significant input to the CCGG from several large Canadian public companies including, in particular, the largest banks and life insurance companies. While there is significant experience with say-on-pay advisory votes in the UK and Australia, widespread implementation of the Model Policy in Canada would need to reflect the realities of the Canadian capital markets. The CCGG itself alludes to several practical issues that arise under the Model Policy, including the following:
- Smaller shareholder engagement — How are boards to engage with small shareholders? Engaging with large institutional shareholders or their organizations would be significantly easier than reaching out to smaller holders.
- Expectations on directors — Members of boards of directors would meet shareholders without management present, which would place greater burdens of time and knowledge on directors. While this may be something that should be expected of directors, the reality is that directors would likely need to commit more time to their duties.
- Expectations on shareholders — With an additional matter to vote upon, responsible shareholders would need to devote time and attention to understanding the compensation practices of their investee companies. This would be a challenge for many shareholders and may increase the importance of third-party proxy reviews.
- Avoiding selective disclosure — Great care would need to be taken by directors engaging with shareholders to ensure that they do not selectively disclose material confidential information in any meetings. Even if such information were not disclosed, shareholders participating in meetings with directors may obtain an informational advantage over other shareholders; ensuring fair disclosure to all shareholders would be an issue.
- Interpreting the results — Interpreting the results of a vote would be a challenge, regardless of the results. A majority vote against the resolution would not necessarily indicate the reasons for the negative vote; a lesser 'no vote' would raise other challenges for the compensation committee and board to understand.
The Model Policy is an important step forward in corporate governance in Canada generally, and continues the tradition established by the CCGG of advancing the views of large institutional shareholders on these matters. Issuers considering adopting either a say-on-pay advisory vote, or the broader shareholder engagement process advocated by the CCGG, would need to consider carefully the practicalities of implementing such policies given their particular circumstances, including their shareholder base. The experience of those large Canadian public companies that are planning say-on-pay advisory votes in the coming months will be instructive for all.
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