“Say on pay” has received increased attention in Canada this year. “Say on pay” is a term used to describe annual non-binding shareholder votes on top executive compensation policies. The results of such advisory votes do not determine whether a compensation committee’s report will be approved, but rather serve as an indicator to the public of the level of shareholder support for a company’s compensation policies. This is particularly important today given the public’s concern with high executive compensation despite poor financial results and decreasing share prices.

The campaign for “say on pay” in Canada scored a major victory this proxy season when proposals for advisory votes were approved by a majority of shareholders at four of Canada’s banks – Royal Bank, CIBC, Bank of Montreal and Bank of Nova Scotia. As a result, National Bank of Canada and Toronto-Dominion Bank agreed to advisory votes on executive compensation prior to proposals being voted on at their upcoming annual general meeting. This is a change from the year before. When shareholder proposals for advisory votes were brought before Canada’s “Big Five” banks in 2008, each of the banks’ boards recommended shareholders vote against the proposals and they failed to pass. The mood is much different this year. The Canadian Coalition for Good Governance (CCGG), an organization representing the interests of institutional investors, changed its position in support of “say on pay” at the end of March, following the voluntary adoption of “say on pay” by such public issuers as Sun Life Financial and Manulife Financial Corporation.

Miller Thomson Analysis

One of the biggest arguments against non-binding advisory votes is that such votes could lead to legal uncertainty and negative voting results provide little guidance to boards as to how to improve compensation policies. Is “say on pay” legislation the next step in Canada? Such legislation is already adopted in the United Kingdom and Australia and legislation for binding annual shareholder votes on executive pay was adopted in the Netherlands, Sweden, Norway, Spain and France. In the U.S., the American Recovery and Reinvestment Act of 2009 (ARRA) was signed into law on February 17, 2009. Under ARRA, financial institutions that received funds under the Troubled Asset Recovery Program (TARP) (approximately 400) are required to submit an annual, non-binding shareholder vote on executive compensation with all proxies filed after February 17, 2009.

What should boards be doing now?

  1. Whether or not a shareholder proposal has been submitted for an advisory shareholder vote on executive compensation, the topic should be addressed at this year’s annual shareholder meeting.
  2. Executive compensation policies should be clear and effort should be made to show a direct alignment between compensation and performance.
  3. Prior to the annual meeting, boards should talk with key shareholders and get their views on the issue.
  4. Current compensation policies should be reviewed and evaluated with a focus on improving executive compensation disclosure.