It’s time for Canadian securities regulators to complete the Say on Pay picture

By: Kevin Thomas, Director of Shareholder Engagement

The debate about executive compensation seems to be defined by exceptions – the exceptionally high pay (compared to average Canadians), the exceptionally high benchmarking against peers, and exceptional Say on Pay votes where a majority of shareholders reject a board’s approach to paying their CEO.

Canadian Say on Pay votes – annual advisory shareholder votes on executive compensation – are for the most part unexceptional. Last year only three TSX firms lost their Say on Pay votes, and so far this year only two – Canadian Pacific and Crescent Point – have lost their votes (although there have been some significant “no” vote shares at other companies). Canadian shareholders have used the vote sparingly, yet effectively, to tackle truly egregious practices.

The reality is that Say on Pay votes have been more remarkable for what they’ve achieved behind the scenes rather than in the vote counts themselves. The most pronounced effect of “Say on Pay” votes has been in creating a critical accountability mechanism for Canadian shareholders, providing shareholders with an opportunity to voice concerns with executive compensation practices in a focused, effective and appropriate manner.

Adopting Say on Pay has been a way for boards to demonstrate their willingness to communicate and discuss their approach to compensation in open dialogue with shareholders, both before and after the annual vote. It provides the right balance between accountability to a company’s owners and the board’s discretion to oversee the company’s overall health and success.

That’s much better than the alternative. If shareholders do not have an efficient, effective and appropriate means of expressing dissatisfaction with the board’s proposed approach to executive compensation, they may be forced to use other less focused methods such as exiting the investment or withholding votes for directors who sit on the Board’s compensation committee. Where the shareholder’s sole concern is the board’s approach to compensation, and those directors are otherwise serving the company well, this would be an unfortunate result.

So, if Say on Pay votes have been such a success, why are they still voluntary at public companies? Why aren’t they part of our securities regulatory regime? Shouldn’t shareholders have the right to vote on executive compensation?

Absolutely. Alongside some of Canada’s largest institutional investors, we’ve asked Canadian securities regulators like the Ontario Securities Commission to begin the process of mandating annual advisory votes on executive compensation for publicly-traded companies. It’s time that regulators stepped in to make Say on Pay a permanent and universal part of Canada’s governance landscape.

Regulators in other jurisdictions, notably the United States, United Kingdom, Australia and Switzerland, already require Say-on-Pay votes for publicly-traded companies. In France, those votes may even become binding on the corporation under a new law.

In Canada, however, regulators have relied on voluntary adoption of Say on Pay by individual firms to drive this improvement in corporate governance.

But voluntary adoption has its limits.

Since 2008, when SHARE worked with Meritas Mutual Funds to file  shareholder proposals asking Canada’s Big Five banks to adopt Say on Pay votes, at least 148 TSX-listed companies have responded by adopting the practice. However this trend is reaching a plateau, with fewer new companies adopting Say on Pay votes in recent years.

We are now at a crossroads, having a clearly effective, relevant and well-tested tool for better corporate governance available and widely supported by Canadian investors but seemingly approaching the upper limit of voluntary adoption by Canadian issuers. Shareholder engagement has taken us this far. It’s time for regulators to complete the picture.

Canada shouldn’t have lower corporate governance standards than similar jurisdictions, nor should we lag our peers in regulating this matter when there is such strong investor interest and participation in voluntary Say on Pay votes here in this country.

As our securities regulators plan the year ahead, Say on Pay needs to be on their rule-making agenda.

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