Say on pay
Why shareholders are suddenly getting cranky about compensation.
Directors of Barrick Gold Corp. lost a showdown with shareholders this week for its “tone-deaf ” response to criticism over the lack of connection between executive pay and company performance.
With Barrick stock languishing at its lowest price since the early 1990s, along with the gold price, 75 per cent of shareholders rose up to vote against the company’s “sayon-pay” resolution at Wednesday’s annual meeting.
It may have amounted to little more than a public embarrassment: chairman John Thornton didn’t give up any pay but pledged to “go back and refine” the compensation system, particularly as it relates to him. But it is just a taste of things to come, say governance experts who have a keen eye on trends in the United States, where regulators released plans this week for prescriptive rules to make companies disclose the relationship between performance and compensation.
Against that backdrop, and the spread of activism across the United States causing companies to begin to capitulate to significant shareholders, allowing them to automatically select their own board nominees, Barrick’s directors dug in their heels when Thornton’s pay issue was raised for the second time in two years.
“In the case of Barrick, it’s really a tone-deaf board,” says Richard Leblanc, associate professor of law, governance and ethics at York University, adding that, even in Canada, institutional investors are “much more assertive.”
The current system in Canada has been criticized for having few teeth, given that rejecting a company’s compensation structure in a “sayon-pay” vote doesn’t mean the company won’t pay out the salary and bonuses it set aside for executives. Barrick’s board, for example, didn’t have to change its decision to award Thornton a 35 per cent pay raise even though the share price fell by almost as much.
But, even in this country, the pendulum that began to swing after the 2008 financial crisis when outrage swelled over the salaries and bonuses paid to executives criticized for pushing the financial system to the brink, is beginning to sway companies.
Four of Canada’s largest banks, for example, are paying a new crop of chief executives substantially less than their predecessors — nearly 20 per cent on average — according to an April report from consulting firm McDowall Associates.
“To suggest that public scrutiny, say-on-pay, wasn’t an influencer (on that) is just naïve,” says Ken Hugessen, founder and partner of consulting firm Hugessen Consulting Inc., which advises on executive compensation. “Of course it was … I can tell you that as an adviser, it’s had a huge influence.”
Still, this year’s overall show of good faith from the country’s biggest banks wasn’t enough to keep shareholders at bay when CIBC chose to bulk up the pay packets of two top executives who left before their negotiated contracts expired once a new CEO was found. A majority of shareholders, those with 56.9 per cent of the company’s stock, voted against CIBC’s “say-on-pay ” resolution, largely to protest a $16.7-million sendoff to CEO Gerry McCaughey, and an $8.5-million payout to chief operating officer Richard Nesbitt. “If you’re losing (even) 20 to 30 per cent of your shareholders who are not happy with something, it’s an issue,” says Hugessen. “And the likelihood that it’s a crackpot minority is pretty darn small.”
Gold companies have been this season’s lightning rod because executives continue to be well paid while shareholders suffer from continued low gold prices. It’s made for some closely watched annual meetings over the past couple of weeks that have shone a spotlight on say-on-pay votes — resolutions usually passed quietly and by a wide margin of 90 per cent or more.
But not all gold company boards have ended up in the same predicament as Barrick’s. Goldcorp Inc., for example, got almost 90 per cent of votes in favour of its sayon-pay resolution presented to shareholders Thursday, despite prominent shareholder advisory firm Glass Lewis & Co. recommending shareholders vote against it.
The disparate outcomes are a sign institutional investors are starting to make their own decisions, rather than relying on sometimes questionable conclusions drawn by the proxy advisory firms based on their particular methodology, say those who study the trends. It also signals say-onpay votes are pushing companies to explain their decision-making to shareholders.
“What prevents a say-onpay failure is dialogue,” says York University’s Leblanc.
In the case of Goldcorp, directors reached out to shareholders to explain the rationale for the board’s compensation decisions before this week’s annual meeting. The independent chair of the compensation committee wrote a letter, and there were “lots of calls,” says Hugessen.
“It’s no substitute for a good fact set. I mean, you can’t com- municate away decisions that just don’t look right,” he said. “But often these things are pretty complicated and with a bit of effort you can get a (better) response.”
Canada is arguably behind other jurisdictions, relying on the willingness of companies to hold say-on-pay votes and justify the rationale behind their compensation decisions to shareholders.
In the United States this week, the U.S. Securities and Exchange Commission proposed a new rule that would compel companies to provide a single table in their annual meeting circulars to make it easy for shareholders to compare executive pay to the company’s overall performance.
Canada doesn’t have a comparable rule, though the “raw” data for such comparisons is available, according to a note distributed by Toronto law firm Torys LLP.
Some companies in the U.S. are beginning to heed shareholder discontent in even more concrete ways.
In February, the board of General Electric Co. amended the company’s bylaws to allow large, long-standing shareholders to nominate candidates for up to 20 per cent of the company’s board positions. That followed approval of a similar “shareholder proxy access” resolution in January by shareholders of Monsanto Co., even though directors had recommended voting against it.
Shareholder rights advocates in Canada are keeping a close eye on such developments. The Canadian Coalition for Good Governance, which is backed by some of the country’s largest institutional investors, is drafting its own policy on shareholder proxy access, with an eye to improving board performance.
“Given the actions of some major U.S. corporations, it is certainly worth having the debate in Canada,” says Anita Anand, a professor at the University of Toronto’s Faculty of Law. “Remember that it is shareholders who elect the directors. They should, similarly, have meaningful rights to nominate at least a proportion of directors who stand for election.”
Leblanc, who is an academic adviser to the governance coalition, says he is encouraged by what he sees as a “long overdue … backbone” developing within the corps of institutional shareholders.
“The Americans have been at this now for five or 10 or 15 years, and their institutional shareholders are highly aggressive, and they keep management in line.”
In the case of Barrick, it’s really a tone-deaf board