Say on Pay gains ground

Shareholders at TransAlta Corporation used an advisory vote on executive compensation to send a message to the board on April 20th when they defeated the board’s motion to endorse its approach to paying top executives. TransAlta’s “say on pay” vote was the first Canadian vote this year where a majority of shareholders voted against the board’s compensation plan.

Three factors most likely swung the vote: one, that the board bumped up the CEO’s pay considerably for actions that some investors (including SHARE) viewed as merely part of doing her job; two, that her pay grew out of line with what executives at similar firms received; and three, that the company reduced dividends substantially in the same year, which led investors to wonder why top executives were being paid extra while shareholders took a haircut. SHARE was also concerned that TransAlta’s long-term compensation plan leans too heavily on stock options and other perks that don’t have real performance measures attached to them.

Since a “say on pay” vote is not binding on the company, it remains to be seen how TransAlta’s board will respond.

However the fact of the vote itself is important. “Say on pay” votes are now a well-established means of communicating with the board on a vital governance matter. As a result of consistent shareholder engagement by SHARE and others over the past ten years, over 177 Canadian companies now hold annual “say on pay” votes.

SHARE has been continuing that process by asking boards of directors at the rest of the TSX Composite Index companies that do not have “say on pay” votes to adopt the practice voluntarily. This year three more companies have agreed, and are holding their first votes at their annual meetings, including PrairieSky Royalty Ltd (TSX:PSK), Western Forest Products Ltd.(TSX:WEF), and Lundin Mining Corporation (TSX:LUN).

Meanwhile, SHARE believes the practice has reached a point where it should be considered the norm amongst TSX-listed companies. Regulators in other jurisdictions like the UK and US already require companies to adopt the practice.

This week, SHARE wrote to the Ontario Securities Commission to comment on its annual priorities, asking that it initiate a market-wide consultation on the practicality of requiring issuers to adopt advisory “say on pay” votes. We told the OSC that, “while we would prefer coordinated action between all Canadian Securities Administrators (CSA) on this issue, if coordinated action is not possible at this moment, the OSC should advance the dialogue between CSA colleagues, issuers and investors by commencing a consultation process as one of its priorities in the coming year.”

That’s not a new request, but it is one that is echoed by large institutional investors across the country, and in light of the sensible use of “say on pay” votes to communicate with companies like TransAlta it’s a timely one.

It’s up to securities administrators to take steps to make it happen more widely.

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