No Votes Against Management Please, We’re Canadian

This year in the U.S., sweeping financial industry reform required that virtually all but the smallest public companies put their executives’ pay schemes to a shareholder vote. These votes, dubbed ‘say on pay’, are advisory, which means that the vote allows shareholders to provide feedback to companies on the way executives are paid but does not give them a veto on the arrangements.

Very few U.S. company pay plans failed to attract majority shareholder support: just 2% of the nation’s largest companies counted more shareholder votes against than in favour on their executives’ pay.

Unlike their U.S. counterparts, Canadian companies are not required to hold pay votes, but some do. In 2009, shareholders filed proposals asking for a say on pay at six of Canada’s largest banks. These proposals were supported by the majority of shareholders, with an average of 55% of votes cast. As a matter of law, the proposals filed were not binding on the banks, no matter how much shareholder support they got, and the banks could have simply ignored them. To their credit, they did not, and in 2010 and 2011, each bank’s shareholders were provided with an opportunity to vote for or against the pay practices and policies for their most highly paid executives. To date, 76 other companies have followed suit, some prompted by shareholder proposals, some because the U.S. law applies to them and some by simply deciding to do so of their own accord.

Shareholders of Canada’s banks were very keen to vote on pay, but apparently not because they wanted the opportunity to vote against current policy and practice. In 2010 and 2011, shareholders approved banker pay by a margin of approximately 95% of votes on average. The percentage of shareholders voting against the pay policies and practices of all the Canadian companies that held votes was generally very low: only 15% of companies that provided a say on pay secured shareholder approval of less than 90%. There were no Canadian pay ‘defeats’.

Several very large Canadian managers of public sector pension funds provide public disclosure of how they vote at company meetings. The reports these managers make about voting on pay help us to understand why Canadian companies report such high votes in favour of their executive pay schemes.

In 2011, the Caisse de dépôt et placement du Québec (CDPQ), Canada Pension Plan Investment Board (CPPIB), Ontario Municipal Employees Retirement System (OMERS) and Ontario Teachers’ Pension Plan Board (OTPPB) collectively made 183 decisions about how to vote say on pay proposals. They voted ‘for’ in almost every case. The only exceptions were votes against from CPPIB and OMERS at Thompson Creek Metals, the Canadian company that reported the highest percentage of votes against, at 35.88%. CDPQ and OTPP did not hold, and therefore did not vote, shares in that company.

Two other public sector pension fund managers that disclose how they vote clearly did so with a more critical eye. In 2011, the Alberta Investment Management Corporation (AIMCo) voted against 7 of the 54 pay plans it reviewed (12.9%) and British Columbia Investment Management Corporation (bcIMC) voted no on 11 of 59 (18.6%). Both of these organizations also disclose the reasons for their vote decisions online: bcIMC’s voting records are published quarterly; AIMCO maintains a searchable database.

AIMCO and bcIMC voted against pay practices that could lead to a misalignment between compensation and corporate performance, a giveaway to executives that shareholders generally want to avoid. They attributed the no votes they cast to: i) pay increases when corporate performance declined, ii) the lack of an upper limit or cap on bonuses, iii) boards with the power to award bonuses with absolute discretion rather than in accordance with at least some specific performance goals, iv) bonus payouts entirely in cash instead of share-based awards that link pay with the future performance of the company, v) target levels of pay fixed by comparing the company to a group of much larger companies, because executive pay generally increases with company size, and, vi) the lack of a compensation “clawback”, which is a mechanism that allows a company to recoup bonuses previously awarded when the corporate financial achievements upon which the bonuses were paid are found to be overstated.

The comments by AIMCO and bcIMC indicate that their votes against were not triggered by a single problematic practice, but were reserved for instances in which two or more of significant deficiencies in a company’s compensation scheme were identified.

Say on pay offers shareholders the opportunity to comment on how companies compensate their most senior managers, while preserving the ultimate authority of boards over pay. It is encouraging that among Canada’s largest pension fund managers, we see some evidence that the pay vote is being used to distinguish acceptable practice from poor practice. All participants in the Canadian market stand to benefit from an increase in shareholder discrimination on executive pay.

Originally from the CWC Blog.

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