How the OSC went AWOL on executive pay
If and when the attack on the “excessive compensation of executives” is launched — and I fear it will come soon — business will complain about the public’s “economic illiteracy” and will bemoan the “hostility to business.” But business will have only itself to blame.
That was management guru Peter Drucker writing in the Wall Street Journal in the mid-1970s, before the metastasis of backdated and reloaded stock options and skyrocketing executive compensation and — wink, wink — the “benchmarking” of the CEO against a group of cronies, I mean to say, peers.
In the contemporary world, we awaken each New Year to the unsurprising revelation that the average CEO has out-earned the average worker while the average worker has stood bleary eyed in the coffee takeout lineup on her first day back at work.
The statistical analysis should serve as a flashpoint. And yet, aside from a scattering of opinion pieces and editorials, the story fizzles.
Take note of the recent actions of BlackRock in the U.K. As reported in the Financial Times, the mammoth asset manager has put the chairs of FTSE 350-listed companies on notice, demanding, the Times says, “an end to pay awards that outpace ordinary employees.”
So called say-on-pay votes are mandatory and binding in the U.K. So the upcoming proxy season in the U.K. promises fireworks.
A spot of history: in the wake of the 2008 financial crisis, an examination of executive pay by the High Pay Commission warned of the ever-widening income gap and the negative effects on the overall economy.
Fix it, the commission said, or prepare for Victorian levels of inequality by 2020. The U.K. already allowed “advisory” say-on-pay votes, in which investors were free to revolt against gargantuan pay awards. To little effect. A wave of executive pay protests in the 2012 proxy season was dubbed the “shareholder spring.”
Say-on-pay votes became binding in 2013. How does the process work? Investors get a binding vote every three years. If a compensation package gets voted down, it’s back to the drawing board for that company.
BlackRock isn’t known for its muscular opposition to executive pay. A shareholder proposal to its own 2016 proxy statement itemized the fund’s anemic record in this regard. Of the 100 CEOs identified by the U.S. non-profit As You Sow as the most overpaid executives, the fund voted nay in only three instances. (John Hancock voted no in 27 per cent of those cases; Charles Schwab voted no in 35 per cent.)
Yet BlackRock, and specifically its leader, Larry Fink, consistently draw headlines for their criticism of short-termism, as in executives being rewarded in alignment with stock pops, not the long-term objectives of the corporation.
I could go on for days about the distortions that rained upon us starting in the ’80s. Did anyone else notice that Ross Johnson died?
But my purpose here is to highlight our own backwater status where say-on-pay is concerned.
Six years ago, the Ontario Securities Commission allowed that it was pondering joining the modern era. The commission was “considering whether securities regulators should consider introducing mandatory Say-on-Pay,” it stated in a 2011 staff notice.
In its draft statement of priorities for 2016-17, the commission took a pass on true proxy access, causing the Canadian Coalition for Good Governance to write that it was “disappointed” that say-on-pay was not included.
“If the OSC has determined that it is not necessary or appropriate to mandate say-on-pay under securities regulation, we request that a public statement be made to that effect,” says the coalition’s letter, referring to advisory, not binding votes.
“We believe that as the regulator of Canada’s primary capital market it is incumbent on the OSC to spearhead the mandatory adoption of say-onpay.”
“We think it’s important because we believe say-on-pay focuses boards on understanding what their pay arrangements are for senior management and on explaining it precisely to shareholders,” says Stephen Erlichman, the coalition’s executive director.
Why, he wonders, does the OSC not want to align itself with a growing international standard? “If you guys have concluded that it’s not something you’re going to do anything about, then tell us,” he says. “We didn’t get an answer to our letter.”
This is the moment where we dryly observe that the OSC continues to monitor developments.
Australia has adopted mandatory, and binding, say-on-pay votes. Such votes go into effect in France this year. Denmark is on board.
I could go on. Of course it’s the responsibility of the board and the executive compensation committee to ensure that the long-term objectives of the corporation are aligned with executive pay. All shareholders should be given a mandatory and binding say on whether that is or is not so. jenwells@thestar.ca