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  • Andrew J. MacDougall & Vanessa Cotric

The State Of Say On Pay

The number of Canadian issuers that have agreed to provide their shareholders with the opportunity to vote on an advisory resolution on executive compensation, or say on pay vote, has slowly continued to increase. The number of Canadian companies that have agreed to hold say on pay votes has reached 97, says the Shareholder Association for Research and Education, up from 70 in May 2011.

Compared to last year, say on pay approval levels among Canadian issuers have declined only slightly. Of the issuers which have held their votes to date this year, the average level of approval has been 92.03 per cent, compared to an average approval level in 2011 of 93.86 per cent. The decline is not as a result of the increase in the number of Canadian issuers adopting say on pay. Looking only at those issuers which held say on pay votes in both 2011 and 2012, the results to date show an average approval level of 91.84 per cent for 2012 versus 93.89 per cent in 2011. Five issuers reported approval of their say on pay resolution this year without specifying the level of approval received.

First Time

This year marks the first time a Canadian issuer has failed to receive majority shareholder approval of the advisory resolution on executive compensation. At QLT Inc.’s annual meeting, over 57.9 per cent of the votes cast were against approval of QLT Inc.’s advisory say on pay resolution. Only three other Canadian companies have received less than 70 per cent approval – Agnico-Eagle Mines Limited (64.06 per cent), Canadian Pacific Railway Limited (61.67 per cent), and MDC Partners Inc. (66.75 per cent). The 70 per cent threshold is important. Institutional Shareholder Services’ (ISS) U.S. Proxy Voting Guidelines state that if the say on pay resolution receives less than 70 per cent support, ISS may recommend voting against the say on pay resolution the following year depending on the company’s response to the vote, whether the issues underlying the voting result are recurring or isolated, and the company’s ownership structure. Although ISS Canada’s Proxy Voting Guidelines do not contain similar language, ISS Canada is likely to be influenced by the ISS U.S. approach in making its recommendations.

Say on pay remains a voluntary practice in Canada. In January last year the Ontario Securities Commission (OSC) issued for comment OSC Staff Notice 54-701 – Regulatory Developments Regarding Shareholder Democracy Issues seeking comment on several shareholder voting initiatives, including say on pay. However, the OSC has not made any subsequent announcements on the issue and say on pay is not mentioned in the statement of priorities for the year ending March 2013 which was issued for comment earlier this year.

Outside of Canada, say on pay has been a hot topic. In particular:

  • In the United States, public companies are required to conduct advisory say on pay votes. ISS has reported that in 2011, 41 Russell 3000 companies failed to receive majority shareholder approval of the company’s say on pay resolution. According to a recent report from Semler Brossy Consulting Group, in 2012 there are already 40 Russell 3000 companies with failed say on pay votes. Among them is Citibank – the first major U.S. financial institution to lose the vote. At least 13 shareholder lawsuits have been filed in the United States based in part on the failed say on pay vote, including a lawsuit filed against Citibank within two days of the announcement of the results of its say on pay vote in 2012. Such lawsuits have not gained much traction to date, and some have been dismissed by courts, but the potential for opportunistic litigation following a failed say on pay vote remains a concern for companies and their shareholders.

  • Public companies in the UK are also required to conduct advisory say on pay votes. This year, several companies have been prompted to make changes in response to investor complaints about executive compensation. In a dramatic turn of events, the CEO of Aviva resigned within days after Aviva shareholders voted against approval of the company’s executive remuneration practices. Meanwhile, the UK is considering a proposal to introduce a binding say on pay vote. Under the proposal, UK companies would be required to disclose the pay practices that will be in effect for the current year and these practices would be subject to a binding shareholder vote. The UK would still retain the advisory say on pay vote, but companies which fail to get at least 75 per cent approval on the advisory vote would have to report within 30 days on the main issues raised by shareholders and how the company proposes to engage with shareholders on these issues.

The vote result for two of the four Canadian issuers which to date have received less than 70 per cent approval on their advisory say on pay reflected shareholder dissatisfaction generally, rather than dissatisfaction with pay practices alone, as shareholders disappointed with corporate performance at QLT Inc. and CP Rail chose to support dissident solicitations to change directors on such boards. And while approval levels in Canada on the average are not much lower than last year, it is clear that executive compensation practices remain a key concern for shareholders. As a general rule, Canadian issuers have a history of consulting with, and taking into consideration, shareholder views on executive compensation. In light of shareholders’ ongoing focus on executive pay, it is more important than ever that Canadian issuers continue to engage with their shareholders on this topic.

Andrew J. MacDougall is a partner at Osler, Hoskin & Harcourt LLP and practices corporate and securities law. Vanessa Cotric is a summer student working in the pensions and benefits, labour and employment and research groups at the firm. The article is from its ‘Update’ collection of articles.


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