The number of Canadian companies providing their shareholders with an opportunity to vote on a nonbinding advisory resolution to approve executive compensation disclosure (say on pay votes) continues to rise, but at a slower speed. As of October 31, 2014, the number of companies conducting say on pay votes increased by 19 companies compared to last year, rising by 14.84% to a total of 147 companies compared to 128 companies in 2013. Meanwhile, shareholder support levels on company say on pay votes increased year-over-year, and no Canadian company failed to receive approval of its say on pay resolution in 2014. Say on pay was largely a non-event for the limited number of (mostly) large companies which offered it in 2014. Say On Pay 2014: Losing Steam in Canada BY SEAN BERNSTEIN AND ANDREW MACDOUGALL Companies Offering Say on Pay Each Year (#) COMPANIES OFFERING SAY ON PAY NO. OF COMPANIES (#) APPROVAL LEVELS (%) 64 60 80 80 70 90 100 100 120 140 160 89 2011 2012 2013 2014 (AS OF OCT. 31, 2014) 92 94 92 128 100 147Say On Pay 2014: Losing Steam in Canada Planning for 2015: A 2014 Canadian Proxy Season Retrospective 21 The number of Canadian companies receiving shareholder proposals seeking a say on pay vote has remained fairly constant each year. According to data available through the Shareholder Association for Research & Education, there were six shareholder proposals requesting a say on pay vote in 2014, the same number each year since 2011 (except in 2012 with four). More recently, one shareholder proposal in 2013 and eight proposals in 2014 sought additional feedback on steps taken where the say on pay vote received less than 97% support. APPROVAL LEVELS The average shareholder approval level in 2014 saw a 1.81% increase in support this year to 91.36%, compared to a 2013 approval level of 89.55%. The 2014 approval average is similar to the 2012 average shareholder approval of 91.57%. The average result in 2013 was weighed down by three companies which failed their say on pay votes, Equal Energy Ltd. (43.79% in favour), Golden Star Resources Ltd. (38.34% in favour) and Barrick Gold Corporation (14.80% in favour), and one company, MDC Partners Inc., which barely squeaked by with the approval of just 50.24% of the votes cast. Absent these four outliers, the 2013 average total would have been 91.33%, approximately the same average level as in 2012 and 2014. No Canadian company failed its say on pay vote in 2014 and only eight companies in 2014 received less than 70% of the votes cast (see chart right). In 2013, there were also seven companies which received less than 70% approval of their say on pay votes, although the average approval level for companies receiving less than 70% approval was considerably higher in 2014 (64.27%) compared to 2013 (46.33%). Shareholders Requesting Say on Pay Votes (#) Year # Proposals 2014 6 2013 6 2012 4 2011 6 Companies % of Votes Crescent Point Energy Corp 56.67 Equal Energy Ltd. 58.10 Rare Element Resources Ltd. 61.33 BlackBerry Ltd. 66.62 Lions Gate Entertainment 67.50 MDC Partners Inc. 67.70 Gastar Exploration Ltd. 67.75 Aurico Gold Inc. 68.45 Companies Receiving Less Than 70% Approval in 2014 (%) No Canadian company failed its say on pay vote in 2014.Say On Pay 2014: Losing Steam in Canada Planning for 2015: A 2014 Canadian Proxy Season Retrospective 22 Number of Canadian Companies Providing Say on Pay Votes by Market Capitalization Year-Over-Year (#) Larger companies generally received higher levels of support. Companies with a market capitalization over $1 billion received 91.77% approval (2013 – 91.39%) whereas the average level of support at other companies was 90.19% approval (2013 – 84.43%). Almost all Canadian companies providing say on pay votes in 2014 are listed on the TSX, with only one company listed on the TSX Venture Exchange and five Canadian companies are not listed on any Canadian stock exchange. Canadian companies interlisted on U.S. and Canadian stock exchanges have fared worse on their say on pay votes than companies listed exclusively on Canadian stock exchanges, although the gap is narrowing. The 67 companies listed exclusively on the TSX had an average say on pay vote of 93.83%, down 1.3% from 95.13% in 2013. The 9 companies listed jointly on the TSX and NASDAQ had an average of 87.85%, up 6.56% from 81.29% in 2013. The 59 companies jointly listed on the TSX and NYSE had an average of 89.76%, up 3.07% from 86.69% in 2013. SAY ON PAY VOTES ARE VOLUNTARY AND LIMITED TO LARGE COMPANIES IN CANADA There is no legal requirement to conduct say on pay votes under Canadian law and votes are generally conducted by Canadian companies on a voluntary basis. Canadian companies providing say on pay votes are overwhelmingly larger companies. Of the 147 companies that conducted say on pay votes in 2014, 101 (68.70% of companies) have a market capitalization over $1 billion, 19 (12.93%) have a market capitalization between $500 million and $1 billion and 27 (13.37%) have a market capitalization below $500 million. $500 M - $1 B < $500 M > $1 B 2013 2014 27 19 101 24 16 88Say On Pay 2014: Losing Steam in Canada Planning for 2015: A 2014 Canadian Proxy Season Retrospective 23 Year-Over-Year Comparison in the Oil & Gas Sector (#) Say on pay was initially adopted by Canadian financial institutions, but Canadian companies in other industries have since adopted the practice. The oil & gas industry led with seven new companies holding say on pay votes in 2014. Approval levels are significantly lower in the oil & gas and mining industries. Year-Over-Year Approval Levels by Industry Sector (#) and Average Say on Pay Vote (%) 0 5 10 15 20 25 30 2011 2012 2013 2014 9 17 21 28 2011 2012 2013 2014 # OF COMPANIES 0 5 10 15 20 25 30 2014 2013 2013 2014 2013 2014 OIL & GAS POWER GENERATION RETAIL TELECOMMUNICATIONS MINING FINANCIAL SERVICES # OF COMPANIES 17 19 23 28 28 22 7 6 7 6 7 6 INDUSTRY 0 5 10 15 20 25 30 2013 2014 MINING FINANCIAL SERVICES OIL & GAS POWER GENERATION RETAIL TELECOMMUNICATIONS # OF COMPANIES INDUSTRY 17 19 23 28 28 22 7 6 7 6 95.18% 93.85% 82.73% 87.08% 87.83% 89.07% 92.13% 94.04% 7 93.84% 6 90.38% 93.88% 96.67% 95.18% 93.85% 82.73% 86.93% 87.03% 89.07% 92.13% 94.04% 93.88% 96.67% 93.84% 90.38%Say On Pay 2014: Losing Steam in Canada Planning for 2015: A 2014 Canadian Proxy Season Retrospective 24 DIFFERENCES IN PRACTICES Annual say on pay votes: Most Canadian companies conducting say on pay votes do so on an annual basis. However, Golden Queen Mining Co. Ltd., Midway Gold Corp., Novacopper Inc., Response Biomedical Corp., Revett Minerals Inc., Secure Energy Services Inc., Tribute Pharmaceuticals and Yamana Gold Inc. have decided to hold their votes every three years instead. Air Canada and Imax Corporation hold say on pay votes every two years. Disclosure of vote results: Most Canadian companies disclose the percentage of votes cast for the say on pay resolution. Four companies: Fennec Pharmaceuticals, Interfor Corp., Kingsway Financial Services Inc. and Aston Hill Financial reported that their say on pay vote passed, but without disclosing the level of support received. It is possible that some of these companies may have received less than 70% approval on their say on pay resolutions and that average results would be lower if detailed results were known. TURNING IT AROUND IN 2014 Seven companies in 2013 and 2014 received less than 70% shareholder approval on their say on pay votes, although only two of the seven received less than 70% approval in both years: Equal Energy Ltd. (58.10% in 2014; 43.79% in 2013) and MDC Partners Inc. (67.70% in 2014; 50.24% in 2013). However, both companies received significantly higher support year-over-year. Companies experiencing the biggest turnaround in voting results from 2013 were those which reached out to their shareholders following their annual meetings in 2013 and made changes to their practices. • Barrick Gold Corp., which holds the record in Canada for the lowest level of shareholder support on a say on pay vote with only 14.80% of shareholders in 2013 voting in favour, received 80.30% approval in 2014. Several steps were taken following the 2013 annual shareholder meeting. The compensation committee engaged extensively with shareholders who represented more than 30% of total outstanding shares and six new directors were appointed to the board in 2014. Changes were made to the company’s compensation arrangements, including adoption of a transparent long-term performance scorecard for grading executive compensation, the granting of share units subject to vesting over three years and, upon vesting, settling in market-purchased shares subject to restrictions on transferability until termination of employment, and reducing cash bonus opportunities which are to be assessed individually for each executive. Pending such changes, salaries were frozen and bonus amounts were reduced. 0 20 2014 2013 40 60 80 100 2013 2014 PERCENTAGE OF VOTE (%) 80.30 14.80 BARRICK GOLD CORP.Say On Pay 2014: Losing Steam in Canada Planning for 2015: A 2014 Canadian Proxy Season Retrospective 25 • Golden Star Resources Ltd. leapt from a failed vote in 2013 with only 38.34% of shareholder support to 97.30% in 2014. In response to the 2013 vote, the company retained an independent compensation advisor for the compensation committee, froze base salaries, increased the level of equity incentives which are performancebased, eliminated single-trigger vesting of equity awards on a change of control, revised its compensation peer group for benchmarking purposes, introduced share ownership requirements for executives and an anti-hedging policy, adopted a compensation clawback policy, terminated participation by executives in a discretionary bonus plan and improved its executive compensation disclosure. • Although the say on pay resolution for MDC Partners Inc. was still below the 70% approval level in 2014, its support level did increase substantially from a mere majority in 2013 (50.24%) to over two-thirds support (67.70%) in 2014. Following the 2013 vote, the compensation committee met with institutional shareholders who comprised more than 60% of the company’s Class A voting shares and made a number of changes to its compensation practices. Such changes included adopting of performance metrics for long-term incentive awards, requiring the repayment of all outstanding loans by the CEO, revisions to the compensation peer group for benchmarking purposes, adopting a compensation clawback policy and prohibiting hedging of company shares. The changes made, however, were not sufficient to satisfy either Institutional Shareholder Services (ISS) or Glass Lewis. • The say on pay approval level rose from 55.80% in 2013 to 95.35% in 2014 for Canadian Natural Resources Ltd. In response to the 2013 vote, the compensation committee solicited feedback from shareholders holding 50% of the outstanding shares, enhanced disclosure of executive compensation practices, engaged an independent consulting firm, and adopted a more rigorous approach to awarding short term incentives. • The say on pay voting results rose from 62.80% in 2013 to 77.02% in 2014 for Thompson Creek Metals Company Inc. Following the 2013 vote, the compensation committee met with shareholders and made changes to the executive compensation program. Changes included freezing base salaries for named officers in 2014; increasing the portion of short term 0 20 40 60 80 100 2013 2014 0 20 2014 2013 40 60 80 100 2013 2014 PERCENTAGE OF VOTE (%) 97.30 38.34 GOLDEN STAR RESOURCES LTD. 0 20 40 60 80 100 2013 2014 0 20 2014 2013 40 60 80 100 2013 2014 PERCENTAGE OF VOTE (%) 67.70 50.24 MDC PARTNERS INC. 0 20 40 60 80 100 2013 2014 0 20 2014 2013 40 60 80 100 PERCENTAGE OF VOTE (%) 95.35 55.80 CANADA NATURAL RESOURCE LTD.Say On Pay 2014: Losing Steam in Canada Planning for 2015: A 2014 Canadian Proxy Season Retrospective 26 incentive tied to company performance; adopting new performance metrics for long term incentives, a compensation clawback policy and share ownership guidelines; and prohibiting hedging of company shares and replacing modified single-trigger change of control arrangements with a double-trigger. Not every company which had less than 70% approval in 2013 appears to have engaged with its shareholders on compensation matters following its 2013 meeting. • Vitran Corporation Inc. does not report having undertaken any actions to engage with shareholders on its compensation practices subsequent to its 2013 annual meeting despite receiving only 58.56% shareholder approval in 2013. Nevertheless, the following year its say on pay resolution was approved by 83.81% of the shareholders who voted on the matter. However, the result likely reflects the fact that at that same meeting, shareholders voted overwhelmingly in favour of a goingprivate transaction at a premium to the share trading price. • Equal Energy Ltd. received a relatively small increase in shareholder support on its say on pay resolution in 2014 (58.10%) compared to 2013 (43.79%). It appears to have taken no actions to engage with shareholders on compensation matters. Its lack of responsiveness may explain why of the three companies that failed to obtain majority approval of its say on pay resolution in 2013, it experienced the smallest improvement in vote results for 2014. It is important to take steps to affirmatively address negative voting recommendations by proxy advisory firms. ISS states that in cases of egregious compensation practices or if the board fails to respond to concerns raised by a prior say on pay vote, it will recommend that shareholders withhold from voting for members of the compensation committee. Glass Lewis states that where a company maintains poor compensation policies yearafter-year, without showing they have taken steps to address the issues, it may also recommend that shareholders vote against the chairman and/or additional members of the compensation committee. 0 20 40 60 80 100 2013 2014 0 20 2014 2013 40 60 80 100 PERCENTAGE OF VOTE (%) 77.02 62.8 THOMPSON CREEK METALS COMPANY INC. 0 20 40 60 80 100 2013 2014 0 20 2014 2013 40 60 80 100 PERCENTAGE OF VOTE (%) 83.81 58.56 VITRAN CORPORATION INC. 0 20 40 60 80 100 2013 2014 0 20 2014 2013 40 60 80 100 PERCENTAGE OF VOTE (%) 43.79 58.10 EQUAL ENERGY LTD.Say On Pay 2014: Losing Steam in Canada Planning for 2015: A 2014 Canadian Proxy Season Retrospective 27 DIRECTOR WITHHOLD VOTES In the absence of a say on pay vote, if ISS concludes that a corporation has engaged in egregious compensation practices, it will recommend withholding from voting for those directors who serve on the compensation committee of the board. Accordingly, one argument cited in favour of voluntary adoption of say on pay voting is that it avoids a director withhold vote result that could trigger a director’s resignation under the corporation’s majority voting policy. Consistent with that argument and even though some corporations experienced relatively low say on pay approval results, the level of withhold votes for members of the compensation committee were not significantly higher. One exception was MDC Partners Inc., which had received less than 70% approval on its say on pay resolution in both years. ISS and Glass Lewis were not satisfied with the changes the company made to its executive compensation practices and not only recommended against approval of the company’s say on pay resolution, but also recommended that shareholders withhold from voting for directors on the compensation committee (although Glass Lewis made an exception for one committee member who was a recent appointee). In the result, more than 22% of the votes were withheld from the election of three of the four directors who sat on the compensation committee, and 16% were withheld from the election of the remaining director. SAY ON PAY INTERNATIONALLY UNITED STATES Advisory say on pay votes have now been required under U.S. legislation for several years. Steven Hall & Partners, an independent compensation consulting firm, reports that of the 3,045 companies which held say on pay votes as of September 4, 2014, 60 failed to obtain shareholder approval, a failure rate of 1.97%. They report that of these 60 companies, 18 failed to obtain shareholder approval for their say on pay resolutions at least once prior to failing the 2014 vote and two such companies, Nabors Industries Ltd. and Tutor Perini Corp., have failed every say on pay vote since 2011. UNITED KINGDOM A series of new rules respecting shareholder approval of executive compensation matters were introduced in the United Kingdom on October 1, 2013, affecting all companies at their 2014 annual meetings. The rules apply to UK incorporated companies whose securities are officially listed in the UK. Annual remuneration reports provided to shareholders must contain three elements: an annual statement by the Remuneration Chair outlining the decisions and changes made regarding executive compensation; a binding forwardlooking remuneration policy that must be voted upon by the shareholders every three years; and an advisory retrospective looking remuneration report which is voted upon annually by shareholders. EUROPEAN UNION While the EU approach has focused almost exclusively on the banking sector in the past, recent legislative proposals would introduce rules similar to the UK. Shareholders would be entitled to a binding vote every three years on executive remuneration plans and vote annually (on an advisory basis) to indicate their Say On Pay 2014: Losing Steam in Canada Planning for 2015: A 2014 Canadian Proxy Season Retrospective 28 satisfaction with how the remuneration plans were being applied. Individual countries would themselves legislate the consequences of a failed say on pay vote. SWITZERLAND In 2013, following the approval by 68% of Swiss voters for an initiative to adopt a requirement for binding say on pay shareholder votes, the Federal Constitution of the Swiss Confederation was revised. The changes created some of the toughest say on pay regulations to date. The rules require say on pay votes to be held annually, the results are binding, and such votes are to be held for each of the members of the executive team, board of directors and advisory board. Pension funds are required to vote and disclose how they voted. In addition, companies are no longer allowed to offer bonuses to executives joining the company (golden handshake) or leaving the company (golden parachute). Violations could be met with fines or imprisonment. An ordinance based on excessive compensation practices in listed corporations came into effect on January 1, 2014, which requires compliance with the changes over 2014 and 2015. In November 2013, Swiss voters rejected a subsequent compensation-related initiative, which would have limited the salary of the highest paid executive to 12 times the salary of the lowest paid employee. AUSTRALIA Since 2005, Australian companies have held an annual advisory say on pay vote. The vote was modified in 2011 by implementing the “two strikes rule,” where if less than 75% of shareholders vote in favour of an executive compensation package for two consecutive years, and shareholders other than key management personnel whose remuneration is disclosed in the remuneration report approve a “board spill resolution,” the company is required to hold a new meeting to elect directors within 90 days. So far, few companies have fallen below the 75% threshold for two consecutive years and there are even fewer instances where a board spill resolution has been approved and, if approved, resulted in a change in the board.