Lessons to be learned from failed Say on Pay vote at CP Rail

By: Kevin Thomas, Director of Shareholder Engagement

When Canadian Pacific lost its Say on Pay vote at its annual general meeting earlier this year by 0.1%, it raised three important points for institutional investors to consider.

First, the extremely tight vote results – 50.1% of shareholders voting against the board’s approach to executive compensation – should be a strong reminder of the importance of the shareholder vote. If just 0.1% of shareholders had failed to vote, or just idly voted with management, that result would have been different. Instead, by actively using their vote, CP shareholders sent a clear signal to the board that they want change.

Full disclosure: SHARE recommended to our proxy voting clients that they vote against the CP pay package.

At issue, of course, was the extremely high pay given to top executives like CEO Hunter Harrison, whose $19.9 million package included items such as $1 million in personal use of the company jet, and whose base pay – which in turn is escalated through bonuses based on a percentage of base pay – is extremely high even by railroad standards. The pay package, which was generous in good times, was hard for investors to swallow in a year when the company’s performance was suffering. For SHARE, an added concern was the large number of layoffs taking place at CP, which raised questions about the balance between executive pay and the experience of other company employees.

A second important point about the CP vote is that it signals the importance of shareholder engagement with the board to explain specific investor concerns and the reasons behind them. The vote is an important tool, but it is also a blunt instrument. Ongoing investor dialogue with boards and management is critical in communicating shareholder viewpoints, advocating for changes, and establishing milestones and reporting. In the wake of the CP vote, the company’s board has reached out to institutional investors and their representatives, such as SHARE, to better understand their votes and discuss changes, which is a positive sign.

Lastly, what does the vote say about the future? Because the current CEO will be retiring in mid-2017 and will be replaced by the current President and COO Keith Creel, the board has an important opportunity. The shift to a new CEO gives the board a chance to re-set pay at reasonable levels and correct problems that may be present in existing employment contracts. However, the board has to take this responsibility seriously. It’s especially important when the board has had a successor CEO in mind for some time that it not desperately offer up the farm in an effort to retain a single candidate.

The CP board has an opportunity to re-set base pay, incentives and targets at levels more appropriate and more palatable for its shareholders. If we want them to do it right, it’s important for institutional investors to make sure the board hears from them about the issues that concern them– through the vote and through shareholder engagement.


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