Say on Pay: Is the Canadian Future Voluntary?


With the annual meeting season now underway, Canadian public companies that have not done so may be considering whether they will voluntarily adopt a Say-on-Pay shareholder vote – a shareholder vote approving the company’s approach to executive compensation.
There is no Canadian legal requirement to present a Say-on-Pay vote, nor does it appear there will be any such requirement in the near future.
Shareholder Say-on-Pay votes on the compensation practices of public companies in Canada started in 2010, when the major Canadian banks gave their shareholders an advisory Say-on-Pay vote. To date, 127 reporting issuers in Canada have adopted Say-on-Pay advisory votes. This number has increased from 71 in 2011 and 99 in 2012. Of the S&P/TSX 60 Index companies, 80 per cent have adopted Say-on-Pay advisory votes. However, only one-third of the approximately 250 companies in the S&P/TSX Composite Index have offered Say-on-Pay advisory votes. In total, approximately 3 per cent of Canada’s some 4,000 public companies have adopted Say on Pay.
Our September 2011 Blakes Bulletin: Say-on-Pay – What’s Next? described some of the considerations relating to the adoption of a Say-on-Pay advisory vote, including the rationale for adopting such a shareholder vote and some of the concerns associated with doing so.
Although Say-on-Pay votes in Canada have been adopted in the form of an advisory vote where shareholders approve on a non-binding basis the approach to executive compensation disclosed in the management proxy circular for the prior fiscal year, Say on Pay has been implemented in different forms in various countries.
On October 1, 2013, new United Kingdom Say-on-Pay rules came into force. The new rules require U.K.-incorporated companies on the U.K. Financial Conduct Authority’s Official List to 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.
Since July 1, 2011, Australian companies have been required to have Say-on-Pay votes on remuneration reports. This requirement is known as the two-strikes regime because if a remuneration report receives a 25-per cent negative vote at two successive annual shareholders meetings, the board is subject to a so-called “spill motion.” If the spill motion receives the support of 50 per cent or more of the company’s shareholders, then a separate general meeting must be called within 90 days at which all directors, excluding the executive directors, stand for re-election.
In March 2013, the Minder Initiative, which enables shareholders to approve or reject any proposed compensation for corporate executives and board members, was approved in Switzerland. Under this initiative, variable pay schemes will also be subject to shareholder approval and certain payments – such as those given to executives joining or leaving the company – will be prohibited. These new provisions, which are perhaps the most strict to date on Say on Pay, are expected to come into force in 2015.
There is a proposed law that will require German-listed companies to have a binding shareholder vote on pay policies for executive board members, starting in 2014.
In France, the Association Française des Entreprises Privées (AFEP) and the Mouvement des Entreprises de France (MEDEF) have published a revised version of their joint corporate governance code for French-listed companies (AFEP-MEDEF Code). The revised version of the AFEP-MEDEF Code includes a provision recommending shareholders have an additional Say-on-Pay vote relating to pay structure. The French government plans to review the results of this corporate governance code before determining whether to introduce legislation.
The European Commission will be publishing proposals for member states to have consistent levels of disclosure on individual remuneration levels and remuneration policies for board members, and to give shareholders a vote on the remuneration policies and/or the remuneration reports.
On January 25, 2011, the U.S. Securities and Exchange Commission issued rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) pursuant to which public companies are required to conduct three different types of shareholder votes:
  • an advisory vote on the company’s executive compensation at least once every three years (equivalent of Say on Pay);
  • an advisory vote at least once every six years to determine the frequency of Say-on-Pay votes: once every one, two or three years (say on frequency); and
  • an advisory vote on certain golden parachute arrangements for meetings at which shareholders are to approve a merger or similar transaction (say on golden parachutes).
Approximately 3,100 U.S. companies held Say-on-Pay votes and 65 U.S. companies had an average negative vote of 60 per cent last year.
Several lawsuits have been filed in the U.S. against public companies since Say-on-Pay votes were instituted under Dodd-Frank.
The first wave of U.S. Say-on-Pay lawsuits alleged that companies’ directors and officers breached their fiduciary duties by adopting executive compensation plans notwithstanding the shareholders’ negative advisory vote. Most of these cases resulted in dismissal for failure to plead the two prongs of demand futility: (1) that the directors were not disinterested or independent and (2) that the transaction was not the product of a valid exercise of business judgment.
The second wave of U.S. Say-on-Pay lawsuits challenges the adequacy of a company’s proxy disclosures on executive compensation and seeks to enjoin the Say-on-Pay advisory vote until the company makes additional disclosures that provide sufficient information regarding executive compensation. There have been some recent victories for defendants in these types of cases that may limit Say-on-Pay lawsuits relating to compensation-related disclosure. For example, in the recent case of Mancuso v. The Clorox Co., a California court ruled that no additional disclosure was required because there was not a “substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made.” This standard and the reasoning of the court provide useful guidance for companies on the potential need to enhance their compensation disclosures.     
As noted above, Say on Pay is not currently required in Canada under Canadian legislation or stock exchange rules. A number of Canada’s largest corporations have adopted an advisory Say-on-Pay vote, either voluntarily or in response to non-binding votes on shareholder proposals.
As noted above, the number of reporting issuers adopting non-binding Say-on-Pay advisory votes in Canada has been increasing; 127 to date from 71 in 2011 and 99 in 2012.
Institutional Shareholders and Market Practices
The Canadian Coalition for Good Governance (CCGG), a group representing institutional investors and asset managers, recommends under their Executive Compensation Principles that companies hold an annual Say-on-Pay advisory vote and that the board take the results into account when considering compensation policies, procedures and decisions. In CCGG’s view, the results of a vote can also be useful to determine whether there has been sufficient shareholder engagement. CCGG also believes that annual votes are preferred as compensation is typically given annually and, as part of the annual proxy voting process, investors focus on executive compensation programs. Lastly, CCGG suggests that the board should disclose the results of the Say-on-Pay advisory vote.
Where a significant number of shareholders oppose the Say-on-Pay resolution, CCGG recommends that the board consult with the shareholders who opposed the resolution in order to understand their concerns and to review the company’s approach to compensation with respect to those concerns. In CCGG’s view, boards should also engage shareholders with respect to any significant year-over-year declines in support for their Say-on-Pay resolution. CCGG also recommends that shareholders who intend to vote against a Say-on-Pay resolution contact the board to discuss their concerns.
Institutional Shareholder Services Inc. (ISS), a proxy advisory firm, updated its Corporate Governance Policy in 2014 to indicate that vote support that falls below 70 per cent indicates substantial shareholder disenchantment with a company’s executive compensation structure, practices or disclosure, which demands a response from the board.
OSC Notice 54-701 on Shareholder Democracy
In January, 2011, the Ontario Securities Commission (OSC) issued OSC Staff Notice 54-701 Regulatory Developments Regarding Shareholder Democracy Issues (Notice 54-701), which identified an advisory Say-on-Pay vote as one of the “shareholder democracy” issues requiring additional review and potential development of regulatory proposals, and requested comments as to whether staff should develop a proposal in this area.
Over 60 submissions were received by the OSC in response to Notice 54-701. These indicated there was little consensus on adopting Say on -Pay at Canadian public companies.
Predictably, most institutional shareholders and their organizations favoured a mandatory advisory Say-on-Pay vote. For instance, CCGG urged the OSC to make annual advisory Say-on-Pay votes mandatory for all Canadian issuers. ISS indicated that advisory votes on executive compensation improve disclosure and corporate governance and support “increased investor responsibility.”
On the other hand, the Institute of Corporate Directors (ICD), and most issuers that commented, indicated opposition to a mandatory Say-on-Pay vote, even with the results being advisory. ICD indicated that it did not believe in the “one size fit all” approach and urged the exercise of caution before promoting universal standards or prescriptive rules. ICD indicated it did not “support practices which effectively undermine or diminish the board of directors’ responsibility on compensation matters.”
One institutional shareholder that does not support shareholder proposals for Say on Pay is the Ontario Teachers’ Pension Plan, which has stated that “it is not the responsibility of shareholders to advise the board on compensation decisions.” It believes that compensation issues are better addressed with “the ability to remove underperforming directors with [its] shareholder vote.”
There have been no regulatory proposals arising from Notice 54-701 nor has there been an update on the status of regulatory consideration of Say on Pay, since the notice was issued three years ago. The OSC issued OSC Staff Notice 11-768 Notice of Statement of Priorities for Financial Year to End March 31, 2014 (Notice 11-768) in June 2013. Although it stated shareholder democracy is a priority for the OSC, Notice 11-768 did not address Say on Pay as a priority and it was absent from the request for comments. However, numerous commenters have encouraged the OSC to continue the review and regulatory development of the shareholder democracy issues identified in Notice 54-701.
Imposing substantive governance rules goes beyond the usual historical role of securities commissions, which has been to prescribe disclosure and related obligations for issuers.
CBCA Consultation
Industry Canada recently published a consultation paper seeking input on a number of possible changes to theCanada Business Corporations Act (CBCA). The paper deals with topics recommended for consultation by a House of Commons committee that reviewed the CBCA in 2009-10. Industry Canada did not put forward alternatives to existing provisions, but instead is seeking public comments and input. The paper addresses a number of governance topics including Say on Pay. For more information, see our December 2013

Blakes Bulletin: CBCA Consultation: Another Cook in the Corporate Governance Kitchen.

Voting Results and Implications

Shareholder support for Say-on-Pay votes has been decreasing. To date, 80 per cent of Canadian companies with Say-on-Pay advisory votes received at least 80 per cent shareholder support and 12 per cent received shareholder support ranging from 50 per cent to 79 per cent. Of these, 20 per cent received between 50-60 per cent support.
Three companies did not receive majority support: Barrick Gold Corporation (Barrick); Equal Energy Ltd.; and Golden Star Resources Ltd. In the case of Barrick, there was a notable “withheld” vote for the directors on the compensation committee, although none failed to receive at least 50 per cent support which would have triggered the company’s “majority voting” policy requirements, requiring the directors to tender their resignations subject to the terms of the policy.
One of the apparent trends from these votes is that shareholders appear to vote against executive compensation practices when a company’s share price has been declining. Similarly, shareholders appear to vote against a Say-on-Pay resolution when there appears to be a disconnect between high CEO pay and weakening performance. In other words, shareholders may be using their Say-on-Pay votes to indicate dissatisfaction with companies’ weaker results, rather than commenting on specific compensation concerns. The opposite also appears to be true, in that companies having the greatest improvement in their Say-on-Pay vote also have improved financial results. 
Based on the Canadian experience thus far, it seems unlikely that directors will be subject to legal liability as a result of a negative Say-on-Pay vote, provided due care is exercised in making executive compensation decisions and accurate disclosure is made with respect to executive compensation in accordance with applicable requirements.
The real “sanction” for a significant negative Say-on-Pay vote may be that it will co-relate to a significant “withhold” vote for directors, especially those on the compensation committee. Majority voting policies are now mandatory for TSX-listed companies as of July 2014, requiring directors to resign if they do not achieve majority support. See our February 2014 Blakes Bulletin: TSX Requires Majority Voting for Election of Directors for more information.
Accordingly, companies that adopt a Say-on-Pay vote and have a majority voting policy will wish to focus on having an effective compensation decision-making process and appropriate disclosure. Most companies who have adopted Say-on-Pay votes in fact provide enhanced voluntary disclosure relating to executive compensation.
Mandatory Say-on-Pay votes, advisory or binding, appear unlikely in the near future in Canada. Although there has been an increased number of Canadian reporting issuers adopting Say on Pay on a voluntary basis, the rate of increase appears to be slowing and as many of the non-controlled larger issuers have adopted a Say-on-Pay vote, it may be that the rate of increase of companies adopting a Say-on-Pay vote will continue to decrease. Companies that have adopted a Say-on-Pay vote, while representing a significant portion of the S&P/TSX 60 Index, still represent a low percentage of the approximately 250 companies that make up the S&P/TSX Composite Index and a very low percentage of all Canadian issuers.
Directors of companies who adopt a Say-on-Pay vote should be mindful that while the likelihood of successful legal and regulatory action against them in Canada for a negative vote appears relatively low, a negative vote may co-relate to a “withhold” vote for directors, especially those on the compensation committee, which in turn may trigger a requirement for affected directors to resign – for issuers who have adopted a majority voting policy – either voluntarily or as a result of the new TSX rules.
Accordingly, issuers who determine to adopt a Say-on-Pay vote will be well advised to focus on enhancing their compensation decision-making and their executive compensation disclosure.
For further information, please contact:
John Tuzyk           416-863-2918 
Jessica Hinman    416-863-5260
or any other member of our Capital Markets & Securities Regulation group.

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