"Say-on-pay": back in the spotlight this proxy season

May 22, 2015

If you’ve been reading the business news lately it’s hard to miss the renewed focus on the “say-on-pay” resolution at annual corporate meetings in Canada. These advisory resolutions, which ask shareholders to support their company’s executive compensation policies and practices first started to appear in Canada in 2010, when the major Canadian banks introduced them. As of late last year, over 140 Canadian companies held say-on-pay votes, including over 75% of the companies on the S&P/TSX 60 Index.  In contrast to 2014, when no Canadian company failed to receive approval of its executive compensation resolution, there have already been a number of well publicized “no” votes in 2015, which is why say-on-pay is again all over the business pages.

What is “say-on-pay”?

“Say-on-pay” describes the ability of shareholders of a company to vote directly on executive compensation. Say-on-pay votes can be binding or non-binding, depending on regulatory requirements or internal corporate policy.  In the U.S., companies subject to Securities and Exchange Commission rules promulgated under Dodd-Frank are required to hold a non-binding say-on-pay vote at least every three years. As well, in the U.K., companies must provide a forward-looking remuneration policy report that is subject to a binding shareholder vote every three years and a retrospective remuneration implementation report that is subject to an annual advisory shareholder vote. In comparison, while considered a good governance practice, Canadian companies are not obligated to hold a say-on-pay vote, nor are they required to implement any changes to their executive compensation even if shareholders vote down the say-on-pay resolution.

The current landscape in Canada  

To date, say-on-pay votes in Canada have generally supported the compensation policies put forward by the company: “no” votes have generally been rare. However, it appears that attitudes may be changing and, as shown by the high profile recent examples - including three large public companies in the past few weeks alone – shareholders may be taking up the opportunity to voice their concerns regarding compensation practices through this avenue.

As noted above, say-on-pay votes are not currently required, either under Canadian legislation or stock exchange rules.   However, in early 2014, as a result of a House of Commons report, Industry Canada published a consultation paper to consider potential amendments to the Canada Business Corporations Act. Specifically, consultations have been held to consider whether say-on-pay votes on executive compensation should be statutorily mandated. See our post “Industry Canada launches CBCA consultation” for further background.In addition, in early 2011, the Ontario Securities Commission published a staff notice which identified a say-on-pay vote as one of the “shareholder democracy” issues requiring additional review and potential development for regulatory proposals, and requested comments as to whether staff should develop a proposal in this area. See our post “OSC to consider majority voting, say-on-pay and other shareholder democracy issues” for further background.It remains to be seen if Canada will follow the other countries in mandating say-on-pay votes.

Institutional shareholders have also been active in Canada with respect to the implementation of say-on-pay votes and shareholder feedback. The Canadian Coalition for Good Governance, a group which represents institutional investors and assets managers, in its Executive Compensation Principles, recommends that companies hold annual say-on-pay votes and that the board consider the results of such votes when determining future compensation policies and engage in conversations with shareholders who oppose the say-on-pay resolution. See “CCGG releases 2013 Principles of Executive Compensation” for further background information. In 2014, Institutional Shareholder Services Inc. (ISS), a proxy advisory firm, updated its Corporate Governance Policy to indicate that vote support that falls below 70% indicates substantial shareholder dissatisfaction with a company’s executive compensation policies, disclosure, or structure, which demands a response from the board.

What does this mean for the future?

While the recent trend may be caused by a number of factors, at a minimum it may be a signal for issuers to work with counsel and executive compensation specialists take a closer look at their compensation policies and practices.   In order to mitigate a “no” vote, it is very important to demonstrate the link between the company’s performance and compensation.  In this regard, public disclosure can go a long way as a strategic communication document.  Comparison between peer groups, explanation of pay philosophy, and a detailed calculation of performance including total shareholder return, among other things, can be instrumental in explaining to shareholders the rationale behind executive compensation policies.  The importance of prior engagement with shareholders and having insight into their sentiments on a company’s pay philosophy and practices can also go a long way to ensuring that shareholders vote “yes” on the say-on-pay resolution.  Instituting a mechanism to allow shareholders to provide timely and meaningful feedback will also allow a board to proactively consider and respond to shareholder concerns.  Specifically, this can be seen by examples in the U.S., where activist investors have become more assertive in exercising their influence over companies, including instituting “vote no” campaigns on say-on-pay resolutions.

DISCLAIMER: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such. Please read our full disclaimer at www.stikeman.com/legal-notice.

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