Canada out of step on say on pay
2013-04-13
Nicolas Van Praet, The National Post
MONTREAL – Every spring, a bespectacled little man with a silver moustache and a penchant for theatrics takes the microphone at select annual shareholder meetings in Canada and gives directors and management a multi-minute tongue-lashing about every corporate governance flaw he’s identified at their company.
It’s the gospel according to Yves Michaud.
This year, like last, Mr. Michaud, founder of Montreal-based shareholder rights group MÉDAC, will try to get the investors of Power Corp. and Quebecor Inc. to adopt advisory shareholder votes on executive compensation — so-called say on pay. This time, like last, the proposal he or his MÉDAC colleagues make will be defeated.
Three years after Canada’s banks first started giving their shareholders a non-binding vote on the remuneration of their senior officers in response to pressure from investor activists like MÉDAC and Kitchener, Ont.-based Meritas Mutual Funds, say on pay remains something only the largest firms are doing. Even then, there are some notable holdouts, including corporations controlled by some of Canada’s wealthiest families like Power’s Desmarais clan, Loblaw’s Westons and the Saputos.
Proponents insist more and more companies are adopting the voluntary practice each year, simply as a matter of good governance. Critics don’t see the point. And so while much of the world moves to a mandatory say on pay system, with some countries even making the votes binding on boards, a deep philosophical rift persists on the question in this country – making the matter tougher for regulators as they figure out the right approach for Canada.
“Shareholder activist groups have kind of cherry-picked the largest issuers in Canada and asked them to adopt say on pay. And they did,” says Paul Gryglewicz, senior partner with compensation advisory firm Global Governance Advisors. “The value really is that the level of dialogue between institutional shareholders and directors has increased. The quality of disclosure has [also] improved because of it. And even though it’s a non-binding vote, I think there are certain parameters of executive pay that have come into better control, specifically around golden parachutes.”
To date, roughly 80 % of Canada’s 60 biggest publicly-traded companies have embraced say on pay, according to the most recent figures provided by Toronto-based law firm Davies Ward Phillips & Vineberg. Beyond the top 60, the ranks of those adopting the practice thin out significantly with only one third of the broader S&P TSX composite index participating and barely 3 % of the country’s 4,000 public companies in all, according to Vancouver’s Shareholder Association for Research and Education (SHARE).
Many commentators have argued that say on pay is a non-issue in Canada because boards are not required by law to act on the results of the vote and because in any case, the vast majority of the votes so far have supported board efforts on compensation with a 90 % backing or better. There has been only one known case where a majority of shareholders voted against the board’s compensation resolution – Vancouver-based biotech firm QLT Inc. In fact, there have been only a handful of no votes of 30 % or higher.
Still, the practice has had an impact, argues Richard Leblanc, a corporate governance specialist at York University.
“The effect of say on pay has been more shareholder engagement as opposed to voting down pay packages,” says Mr. Leblanc, adding that regulators everywhere are grappling with compensation regimes, including questions like the proper ratio of executive pay to that of the average worker. “We’re not through it yet and this is not a solved problem.”
Unless Canada’s financial regulators, or its main TSX exchange, introduce rules forcing companies to adopt the practice, there seems little chance of universal adoption. There are vocal opponents even to a voluntary system.
Take Power Corp. It says mandatory shareholder votes on executive compensation at companies with a controlling shareholder, like Power, would serve no purpose because the controlling shareholder has an ongoing relationship with the company’s board and wouldn’t choose the annual meeting as the forum to express its displeasure.
But it goes even further, stating in a 2011 public submission on the matter : “If shareholders are to be encouraged to usurp the role of the board, one is tempted to ask why such intrusion should stop with executive compensation and not extend to other issues such as corporate strategy.”
In other words, says Timothy Rowley, director of University of Toronto’s Clarkson Centre of Business Ethics and Board Effectiveness : “If we start getting regulation into it, you might as well get rid of boards.”
Mr. Rowley says say on pay might keep a lid on unbridled expansion of executive compensation. But he says it could also thwart director efforts to develop a better pay for performance policy. The argument is that boards are privy to inside information that shareholders never see because of competitive concerns and that means they understand much better than shareholders what types of compensation work best.
There are other problems with say on pay. For one, the results of a vote are ambiguous : You don’t know which shareholders are voting for or against the compensation system. And you don’t know what aspect of that system they don’t like.
“You get yourself into this cycle where the board is supposed to be responsive and they want to be,” says Carol Hansell, senior partner at Davies and a board member of the International Corporate Governance Network. “But they don’t know what to be responsive to.”
Other countries have moved far past Canada in introducing checks on executive compensation. Switzerland this spring introduced binding votes on pay packages and eliminated bonuses for executives joining or leaving a business. The Swiss outrage started with opposition to pay at Swissair and was bolstered by public opposition to a US $78-million proposed severance for Novartis AG’s departing chairman.
The United States also has mandatory nonbinding shareholder votes on executive pay, a response in part to criticism over the compensation excesses at Wall St. firms during the financial crisis. Opinion is divided over whether Canada will follow and regulate the matter.
In other nations, say on pay has been a political response to public outrage over compensation, says Andrew MacDougall, a corporate and securites lawyer with Osler, Hoskin & Harcourt LLP in Toronto. Canada has not experienced that same public indignation.
Canada’s current system is imperfect but it’s working well, says SHARE’s policy director Laura O’Neill. “We’re a bit of an experiment doing this on a voluntary basis,” she concludes. “It’s invigorated a debate around executive compensation that did not exist before we started seeing these ballot items come forward. I think it’s fascinating really that we’re doing this currently without regulation.”
