In 2008, shareholders of our ‘big five’ banks will be the first investors in a Canadian public company to consider a proposal requesting an annual non-binding vote on the compensation of top executives.
A company that has an advisory vote enables its shareholders to vote ‘for’ or ‘against’ the executive compensation report included in their proxy materials.
Dubbed ‘say on pay’ in the U.S., this proposal has been very successful in 2006 and 2007 on the ballots of large and mid-sized U.S. companies. Two years ago, the proposal came to a vote seven times and garnered an average 40% support. Last year, it was approved by more than 42% of votes on average in more than 50 outings. In eight cases, the proposals were supported by the majority of shareholders who cast ballots on the issue.
U.S. investors have seen some real movement on the implementation of the say on pay. Over the past few months, three U.S. companies agreed to give their shareholders an advisory vote on executive pay: Aflac, Verizon Communications and Par Pharmaceuticals. Other issuers are reportedly becoming more responsive to shareholder feedback on pay.
Pfizer Inc. has not yet implemented the advisory vote. Instead, the company held a meeting in October, 2007 with institutional investors representing a 35% equity stake in the company to hear their views on corporate governance issues, including executive pay.
This Pfizer compromise is unlikely to win over investors. Shareholders are continuing to pressure U. S. companies to give them a non-binding vote on pay. “We appreciate this new wave of communication to investors around compensation,” stated Russell Read, Chief Investment Officer of CalPERS. “However, to make this a two way street, investors need to have a clear opportunity not just for private conversation, but for public feedback on compensation packages. Thus we are urging that expanded communication be connected to a new accountability to shareowners through the Advisory Vote” stated Russell Read, Chief Investment Officer of The California Public Employees’ Retirement System (CalPERS).
CalPERS is one of a network of dozens of shareholders that have filed say on pay resolutions at more than 90 U.S. companies for 2008.
In the U.K., companies have been required to provide shareholders with an advisory vote on executive compensation since 2003. Only very rarely – just eight times in thousands of votes over four years – have a majority of shareholders rejected company pay decisions. Governance experts indicate that the real benefits of the advisory vote on executive compensation for U.K. shareholders are better disclosure and greater responsiveness to their concerns.
This issue is a new feature of the Canadian corporate landscape. Some Canadian companies argue that the advisory vote is not necessary because disclosure of pay is good and is improving. Companies are working hard to do a better job of explaining executive pay, they say. But disclosure, even if it is clear, complete and concise, is a presentation, not a conversation.
All shareholders should directly address executive compensation every year in the form of a vote on a clear question. Vote results will help boards develop an understanding of how shareholders view the compensation decisions made on their behalf. A negative result will indicate that the directors are not paying attention to evolving thought on executive pay. Votes heavily in favour will reward boards that assess the market carefully and pay responsibly.
No doubt both Canadian companies and shareholders keenly await the upcoming advisory votes on executive compensation.