Nay on say

By Agnese Smith January - February 2013

Will Canada ever legislate mandatory say on pay? Or is a voluntary approach enough?

Nay on say Carol Hansell, Davies Ward Phillips & Vineberg, Toronto
Photo credit: Mark Stegel

As companies around the world prepare for their annual springtime chat with shareholders, some Canadian boards may be sighing with relief. Unlike their peers south of the border and across the Atlantic, firms here can still choose whether to consult with shareholders about how much to pay their chiefs.

And this voluntary regime is unlikely to change any time soon.

Few expect Canadian regulators to rush through legislation mandating that shareholders be given an advisory vote on compensation, so-called say on pay. Part of the reason is that more and more firms here are expected to offer investors a voice, regardless of what regulators decide.

“I don’t think legislation is necessary because many companies are moving towards say on pay. The larger companies have already adopted it and this trend will continue among the smaller” firms, said Carol Hansell, senior partner at Davies Ward Phillips & Vineberg and a board member of the International Corporate Governance Network, which collectively represent about $18-trillion in funds under management. “I certainly advise companies to adopt it.”

Under pressure from activists such as Kitchener-based Meritas Mutual Funds, Canadian banks started putting pay on the ballot voluntarily in 2010. Most of Canada’s biggest public companies have followed suit since then (see sidebar), though some large firms like Power Corporation of Canada still don’t give a vote. And they aren’t legally required to do so, unlike firms in some European countries, the U.S. and Britain, where shareholder pay protests last spring helped topple a few signi­ficant chiefs.

But it’s debatable whether Canada’s economy and business environment would benefit from mandatory non-binding votes for shareholders, which are becoming increasingly standard elsewhere. For now, offering voluntary votes has wide support; legislated say on pay is viewed by many as a knee-jerk political response to a crisis elsewhere that would add an unnecessary burden for many firms. These voices tend to favour strengthening requirements of board members as a better way to way to achieve pay that is more aligned with performance.

Andrew MacDougall, Osler, Hoskin & Harcourt, Toronto

Andrew MacDougall, Osler, Hoskin & Harcourt, Toronto
Photo credit: Mark Stegel

Others view mandatory shareholder votes as a common-sense governance tool that many companies simply won’t employ unless forced to do so. If one accepts that average CEO pay has become inflated in relation to profits under the sole direction of compensation committees, why not tinker with the current system, as other countries have, albeit in different forms?

Reluctant Canada

In most of Scandinavia, a mandatory say on pay vote is binding — meaning that boards cannot ignore shareholders’ wishes.

Britain, one of the first countries to mandate advisory say on pay, is expected to toughen legislation in 2013, giving shareholders the legal power to say no. Across the Channel, European regulators are also considering changes to compensation laws, with EU Internal Market Commissioner Michel Barnier leading the charge, according to press reports.

Canada may soon be lapped even by Switzerland, a country that is famous for its glacial pace of change and pro-business attitude. In what is expected to be a spirited campaign, Swiss citizens will vote in March whether to pass binding compensation legislation with the hardest bite in the world. Polls reportedly show significant support for the initiative thanks to public wrath over the country’s bailout of banks during the economic crisis and continued high CEO pay.

“It is surprising” that Canada has not adopted such legislation, said John Wilcox, chairman of Sodali, a global consultancy that advises companies on corporate governance, speaking from New York. “Experience in the rest of the world demonstrates that this is an effective form of governance. It makes directors do a better job of explaining, of clarifying their reasoning and this is seen as a very good thing.”

At the moment, Canada’s reticence at mandating compensation votes hasn’t affected its good standing in the international community. “Having a say on pay vote is a consideration in our ratings but only one of 150 key metrics so it is unlikely to affect the country’s standings,” according o Paul Hodgson, chief research analyst at corporate governance consulting firm GMI Ratings, in an email interview. In GMI’s global rankings, Canada comes second to Britain, which leads the pack.

Plenty of apathy

The reasons behind Canada’s reluctance to adopt mandatory say on pay legislation are varied.  Its comparatively hale economy no doubt plays a role, though whether these good feelings will remain in an era of lower commodity prices and a higher Canadian dollar remains to be seen.

Public apathy also tops the list of reasons. Unlike other parts of the world, Canada has neither endured the economic convulsion brought on by the banking crisis nor bailed out companies with taxpayer funds only to see chief executives responsible for the mishaps reap even more rewards. The electorate here is not baying for executive blood and politicians have not been forced to lead the charge on “fat cat” salaries.

Likewise, the country’s robust corporate governance reputation, including already abundant compensation disclosure, protection of shareholders and good communication between firms and investors, reduces the imperative to jump on the shareholder vote bandwagon, some experts say.

Laura O’Neill, SHARE, Vancouver

Laura O’Neill, SHARE, Vancouver
Photo credit: Venturi+Karpa

“Until there’s some sort of trigger” — voter outrage at perceived excessive salaries — “I’m not sure there will be a dramatic change,” says Andrew MacDougall, a partner at Osler, Hoskin & Harcourt in Toronto.

It helps that pay scandals involving rescued financial companies, privatized utilities or semi-monopolistic companies — like Dick Grasso’s $140-million payout from the New York Stock Exchange in 2003 — haven’t featured prominently in the Canadian landscape during the last decade; this not­withstanding the fact that Toronto’s benchmark index’s 100 highest paid chief executives earned 235 times the average Canadian worker’s pay.

Even then, Canadian CEOs earn relatively modest pay packets compared with peers in the U.S. In terms of shock value, Frank Stronach’s $61-million paycheque from Magna International Inc. pales in comparison with Apple CEO Tim Cook’s $370-odd million in 2011.

On the other hand, the leaders of Canadian public pension funds, which operate at arm’s length from government but are not fully independent, are comparatively well remunerated. For example, Jim Leech at OTTP earned in excess of $4-million in 2011 while Mark Wiseman of the Canada Pension Plan Investment Board took home about $3-million, according to their annual reports.

This is in sharp contrast to public pension chiefs in other parts of the world like the California Public Employees’ Retirement System (CalPERS) the biggest public pension fund in the US, which pays its CEO Anne Stausboll in the vicinity of $380,000.

Not so much unity

Regulators at times appear mildly interested in the matter of mandatory say on pay. Two years ago, the Ontario Securities Commission asked participants for their views on a variety of shareholder issues including remuneration. However, the OSC hasn’t published any results or clarified whether a change is imminent.

Nevertheless, many shareholders and shareholder organizations support mandatory laws, including the Toronto-based Canadian Coalition for Good Governance (CCGG), the voice of Canadian institutional investors, which represents about $2- trillion in assets. The Shareholder Association for Research and Education (SHARE), an advocacy group based in Vancouver, which along with Meritas and Quebec activists was instrumental in getting executive remuneration on the national agenda, is also pushing for mandatory votes on compensation.

That said, Laura O’Neill, director of law and policy at SHARE, is not “optimistic” about significant progress on this front. “Although I can only speculate as to the reasons for their reluctance to introduce say on pay, the regulator does appear to be the roadblock,” O’Neill wrote in an email interview.

Among Canada’s largest institutional shareholders who do not support legislated say on pay are Teachers, Canada’s third-biggest retirement-fund manager, and asset manager Blackrock Asset Management Canada (a private company) according to their statements to the OSC in March 2011.

Interestingly, both institutions sit on the board of the CCGG, which only recently reversed its opposition to mandatory say on pay legislation in 2009, which has led to speculation that regulators are getting some mixed signals.

“Are they pushing very strongly? I am not sure there’s unity” on this issue, says Michel Magnan, a professor at Montreal’s Concordia University, who questions the benefits of mandatory votes.

On one hand, the highly paid “executives of large public sector pension funds are unlikely to experience sticker shock when they review executives’ pay,” said SHARE’s O’Neill. As investors, however, fund managers chase ever better results, making them motivated to ensure the best possible compensation and corporate governance decisions, which would likely make them more supportive of measures such as say on pay, she said.

Restraining the growth of salaries is only part of the benefits of say on pay, says Wilcox. The majority of investors are actually more interested in the underlying logic of how compensation is determined, not necessarily the main figure. “Seeing how a board makes decisions on pay is really like taking its temperature. It’s about how well the board of directors is doing its job.”

Besides, few outside Canada consider mandatory say on pay a radical measure. Rather it is the plain vanilla flavour of corporate governance. For many observers, there isn’t a compelling reason why Canada should not adopt it.

But opponents of mandatory say on pay underscore that the measure is quite a blunt tool for reining in corporate pay, which has risen throughout the world despite legislation and a gloomy economic outlook.

What’s more, there is the issue of accountability and who is in the best position to make decisions on compensation.

“We believe that a properly constituted board should address compensation issues in the normal course of fulfilling its responsibilities, and that a board generally requires the freedom and flexibility to develop and establish a compensation system in the manner that is best for the individual company,” according to a statement by Teachers on its website. “We will generally not support share­holder proposals seeking to implement an advisory vote on compensation.”

Critics point out that boards are responsible for making core decisions about the future of a company and as such are legally bound to keep in mind the health of the firm in years to come, not just the current share price that benefits fleeting stakeholders. The line between the board’s responsibility and shareholders’ rights risk becoming blurred if Canada adopts mandatory requirements on say on pay.

“Why stop there — why not ask shareholders to vote on everything?” asks Concordia’s Magnan. “You are undercutting your own legal framework.”

The one thing most observers agree upon: in the absence of public outcry over compensation, say on pay votes may make further inroads into corporate Canada, but will likely remain voluntary.

“It’s good corporate hygiene,” says Christopher Chen, national director at pay consultancy Hay Group in Toronto. More and more Canadian companies will opt to offer a non-binding vote in the future. Chen adds, however, that mandatory is not appropriate in the Canadian context.

In other words, while say on pay is good, less government interference is better.

Executive pay in Canada… and around the world

Comparing average Canadian CEO pay with international peers is difficult — much depends on what surveys are chosen within each country. However, Canada appears to slot somewhere in the middle.

The 100 highest paid chief executives whose companies are listed on the S&P/TSX composite index made an average of $7,695,625 in 2011, according to the latest figures from the Canadian Centre for Policy Alternatives. The average Canadian worker took home $45,488. Meanwhile, European counterparts on the DJ Stoxx Europe 50 earned about Euro 5.8-million ($7,488,032 CAD) in the 2011 reporting season, according to figures from Towers Watson in April. The average chief executive of a FTSE 100 company in the UK earned a total of about 4-million pounds ($6,326,760 CAD) in the year to this June, said research firm IDS in a recent report. In the U.S., CEOs earned about $9.6-million, reported The Associated Press using data from Equilar, an executive pay research firm.

At least they’re asking

Out of the 4,000 or so Canadian public companies, 99 have so far opted to give investors a non-binding vote, according to Shareholder Association for Research and Education (SHARE). SHARE data show that say on pay votes were held by 46 of the S&P/TSX Index of the 60 largest companies. For the benchmark S&P/TSX Composite Index, 80 out of 250 firms offer it.

A list of the 99 Canadian incorporated issuers that have adopted say on pay can be found on

To date, Britain, The Netherlands, Australia, Sweden, Norway, Denmark, and the U.S. require some form of say on pay. Swiss citizens will vote in March whether to legislate it.

Agnese Smith is a journalist based in Rapperswil, Switzerland.
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