A growing number of Canadian companies are holding say-on-pay votes at their AGMs, with more than 200 last year, up from 183 in 2018. The average support for say-on-pay votes in 2019 was 90.9 percent, down slightly from 91.9 percent average support in 2018, according to Laurel Hill Advisory Group.
This is well aligned with the amendments to the Canada Business Corporations Act, adopted by the federal government through Bill C-97, Budget Implementation Act, 2019, No 1. Once in force, this will make it mandatory for ‘prescribed corporations’ to hold a say-on-pay vote, although this is not expected to happen until after the 2020 proxy season.
Investment managers have noted that institutional investors appear to be increasingly exercising independent judgment relating to say on pay, with 20 companies receiving less than 80 percent support where 12 of those companies had favorable proxy-adviser recommendations, as reported by Gryphon Advisors. Reasons for the opposition (as noted in Laurel Hill’s report) include:
- CEO and named executive officer pay has increased faster than total shareholder return (TSR)
- CEO and named executive officer pay has been viewed as misaligned with the size and stage of the business.
Generally, the tipping point for when it is expected management will engage with shareholders opposing a say-on-pay vote is 80 percent for Glass Lewis and 70 percent for ISS. But say-on-pay resolutions are assessed on a case-by-case basis, so other factors may be taken into consideration, such as support for say on pay.
GREATER EXECUTIVE PAY TRANSPARENCY AND DIRECTOR PAY SCRUTINY
The Canadian Coalition for Good Governance’s annual publications on best practices for proxy circular disclosure consistently recommend that boards enhance disclosure of any adjustments made to financial performance measures within the issuer’s executive compensation structures, including the board’s role and level of scrutiny applied to determine the adjustment used.
For director pay, of note for 2020 is the ISS policy revision relating to the past approach taken by boards in setting and approving director compensation, where ISS will recommend a ‘withhold’ vote in the event of two consecutive years of high director pay (relative to ISS-determined Canadian peer company boards) unless satisfactory reasons for this are provided in the company’s disclosure.
It may be useful for directors to monitor director pay among peer company boards and consider where their pay levels fall, as well as whether additional detail is appropriate in their disclosure relating to the determination of and changes to annual director compensation.
PAY FOR PERFORMANCE METRICS
Beginning in 2019, ISS’ research reports for Canada began including additional information on company performance using economic value-added (Eva) metrics in response to ISS client feedback asking the proxy adviser to consider using additional metrics beyond TSR. Eva = net operating profit after taxes minus (cost of capital x capital).
Eva involves the application of uniform, rules-based adjustments to financial statement accounting data, which aims to measure a company’s underlying economic profit and capital productivity. By contrast, TSR focuses on the growth of shareholder return on invested capital over time, accounting for dividends and market value gains.
The impact of this will see ISS incorporate Eva metrics into its quantitative pay-for-performance models. This will be interesting to monitor because ISS reported in the results of its Global Benchmark Policy Survey for 2020 that when asked about Eva and the display of prior-used Gaap-based metrics, many investors and non-investors (84 percent and 71 percent, respectively) indicate that prior-used Gaap metrics should be displayed below the Eva as a point of comparison.
We encourage you to consider what these trends and developments mean for your organization, specifically how they impact your annual meeting preparation and continuing corporate governance matters. For many issuers, this means conducting a strategic review of stakeholder-focused communication, including continuous disclosure materials, board and committee charters, company policies and underlying frameworks with a view to:
- Identifying gaps in current disclosure, policies and materials and determining options for your organization to address
- Reviewing the frameworks and processes that support disclosure, charters and policies, particularly as they relate to risk management
- Simplifying disclosure to focus on quality of disclosure specific to the organization, its business and its risks
- Aligning policies and/or public filings with regulatory and best practice updates and changes made this year and in past years, while taking a fresh look to eliminate redundancies or inconsistencies.
Lisa Culbert is counsel, legal design & operations and Ramandeep Grewal is a partner with Stikeman Elliott in Toronto