It was a rare display of investor displeasure at Barrick Gold’s annual meeting last year, when shareholders voted to reject the company’s executive compensation practices. With a staggering 85.2 per cent of votes expressing disapproval of the Toronto-based mining outfit’s pay practices, the results represented the strongest nay vote in Canadian say-on-pay history.

The results, of course, should not have taken Barrick by surprise. Eight major pension funds, including heavyweights such as the Canada Pension Plan Investment Board and the Ontario Teachers’ Pension Plan, had banded together to oppose an $11.9-million signing bonus paid to Barrick co-chairman John Thornton in 2012. Prior to the vote, this group, which represented nearly $1 trillion in assets at the time, issued a press release outlining its position. A letter of complaint was also sent directly to company chairman and founder Peter Munk.

Say-on-pay votes give shareholders an opportunity to express their opinion before deciding whether or not to take more drastic actions to voice their displeasure (such as sell their shares, vote against re-election of directors or pursue a more activist agenda, including publicity campaigns, proxy battles, shareholder resolutions and even litigation). Nevertheless, they have become an increasingly popular subject of debate in the world of corporate governance, especially in Canada, where say-on-pay votes are voluntary and non-binding.

In addition to helping curb excessive compensation, proponents argue say-on-pay votes also help improve communication between shareholders and boards of directors. After all, since a negative outcome can be embarrassing, companies with a say-on-pay vote on the horizon have more incentive to proactively seek out shareholder approval for executive pay packages. Opponents, however, insist this represents unwarranted shareholder micromanagement. As far as this camp is concerned, the process of setting pay levels is best left to corporate directors, who are better informed on appropriate incentives and competitive benchmarks.

Simply put, the goal of say-on-pay is to increase the accountability, transparency and performance linkage of executive pay, which for CEOs of the 100 largest companies in Canada averaged $7.7 million, or 169 times the average annual wage of $45,448 in 2011, according to the Canadian Centre for Policy Alternatives. This article makes the case for mandatory votes in Canada by examining the effectiveness of stronger say-on-pay policies in other parts of the world.

Britain introduced the investing world to the concept of say-on-pay votes during the dot-com era, when Stephen Byers, a former UK Secretary of State for Trade and Industry, announced the government’s intention to introduce mandatory say-on-pay votes in July 1999. Say-on-pay in the UK was not formally adopted, however, until the introduction of the Directors’ Remuneration Report Regulations in August 2002. Along with mandating additional director compensation disclosures, the new legislation, which became effective in 2003, required all UK companies listed on major exchanges (foreign or local) to hold a non-binding advisory shareholder vote on executive compensation at annual company meetings. In 2013, say-on-pay votes in the UK became binding. As a result, the executive pay practices at public British companies must now be approved by at least 50 per cent of shareholders and UK companies are now legally obligated to keep executive compensation strictly within the limits of shareholder-approved policies.

In the United States, say-on-pay appeared first in February 2009 as part of Washington’s Troubled Asset Relief Program (TARP), which required any company with financial assistance loans outstanding to give shareholders a say-on-pay vote. Following the introduction of the Dodd-Frank Act in 2011, all U.S. public companies were required to hold shareholder advisory votes on executive compensation.

Internationally, say-on-pay has gained considerable momentum. Generally, say-on-pay countries require annual votes. Notable exceptions include the Netherlands and Denmark, which require say-on-pay votes only when changes are made to executive compensation plans. The US allows say-on-pay votes to be held annually, biennially or triennially, subject to a mandatory shareholder vote on frequency once every six years. A 2012 study found that among ten major countries, only Switzerland, Germany and Canada lacked mandatory say-on-pay. Since then, Switzerland has made the votes mandatory and binding. The German parliament, meanwhile, recently voted against legislation supported by the government, which would have required non-binding shareholder votes, because the Social Democratic Party deemed them not aggressive enough in the battle to control executive pay by.

 

Source: Fabrizio and Maber (2012)

As one of the few developed countries that still maintain a voluntary and non-binding say-on-pay system, Canada remains a clear outlier. Despite the lack of formal regulation, many organizations strongly support say-on-pay in Canada, where Thomson Corporation held the first say-on-pay vote in 2009 (thanks to the company’s acquisition of Reuters, which forced Thomson to follow UK say-on-pay rules). The Canadian Coalition for Good Governance (CCGG) offers a model policy on say-on-pay to help interested Canadian companies with implementation. The Vancouver-based Shareholder Association for Research and Education (SHARE) is another strong proponent that maintains a list of Canadian issuers who have adopted say-on-pay. But opposition to say-on-pay in Canada is also strong. And it is backed by major family-owned corporations such as Power Corporation and George Weston Limited. These firms cite several reasons for their anti-vote position, including the complexity of executive pay arrangements, the use of external professional guidance and the belief that the board is in the best position to make appropriate compensation decisions.

According to a report by Osler, just 129 Canadian companies had adopted say-on-pay votes as of mid-2013. Of this number, 123 were listed on the Toronto Stock Exchange (TSX), which was host to 1,559 companies at the time of the study. In other words, less than 10 per cent of TSX-listed companies had adopted say-on-pay by mid-2013. Among larger companies, say-on-pay is more common. About 60 per cent of Canada’s 100 largest companies have adopted say-on-pay (see Table 1). Nevertheless, because of the voluntary adoption system in Canada, shareholders who would probably benefit the most from an advisory vote on pay are typically not provided with the opportunity.

Table 1 – Say-on-pay adoption in Canada by year for the 100 largest companies

Year	Number of Canadian companies adopting say-on-pay	Percentage of total adopters	Cumulative adoption percentage among 100 largest companies
2009	1	1.7%	1.0%
2010	20	33.9%	21.0%
2011	17	28.8%	38.0%
2012	15	25.4%	53.0%
2013 (to September)	6	10.2%	59.0%

It might be surprising to see that so many of Canada’s largest firms have voluntarily chosen to adopt say-on-pay. However, based on declining adoption numbers in recent years, momentum is ebbing. By this point, most firms inclined to voluntarily adopt say-on-pay have likely done so already.

Although say-on-pay votes in Canada are voluntary and advisory only, many consider an approval rate of less than 70 per cent to be embarrassing enough to provide a strong incentive for change. Table 2 shows say-on-pay voting results for our 100 sample companies for 2012 and 2013.

Table 2 – Say-on-pay voting results in Canada by year for the 100 largest companies

Year	Average approval vote	Median approval vote	Standard deviation of approval votes	Lowest approval vote	Companies with approval below 70%	Companies with approval below 50%
2012	91.4%	95.0%	8.8%	61.7%	2.0%	0.0%
2013	89.8%	94.0%	13.2%	14.8%	2.0%	1.0%

The negative say-on-pay vote at Barrick last year is the only outright rejection of executive compensation policies to date in Canada. Nevertheless, it demonstrates a willingness amongst investors to voice their displeasure and therefore serves as a strong deterrent for other companies by warning them to avoid unpopular pay practices or face public condemnation.

It is worth asking if Canadian firms that have adopted say-on-pay are different than those that have not. In Table 3, we present a comparison of firm characteristics for the 100 largest companies in Canada.

Table 3 – Firm characteristics of say-on-pay adopters versus non-adopters

Year	Average approval vote	Median approval vote	Standard deviation of approval votes	Lowest approval vote	Companies with approval below 70%	Companies with approval below 50%
2012	91.4%	95.0%	8.8%	61.7%	2.0%	0.0%
2013	89.8%	94.0%	13.2%	14.8%	2.0%	1.0%

SOURCE: Globe and Mail, Clarkson Centre for Board Effectiveness

From the data, it is clear that adopters and non-adopters are different in many regards. On average, adopters are significantly larger than non-adopters for both market capitalization and assets. Furthermore, with 71.2 per cent of adopting firms being cross-listed—typically on the NYSE or NASDAQ—we see that the influence of the US’s mandatory say-on-pay regulations seems to extend to Canada. Even though Canadian cross-listed companies are not subject to mandatory say-on-pay votes under the Dodd-Frank Act, many have adopted the policy. In fact, 84 per cent of cross-listed firms have adopted say-on-pay versus only 34 percent of those not cross-listed. Of the 13 family firms in our sample—including George Weston, Power Corporation and Saputo Incorporated—a striking 69.2 per cent were non-adopters. This is not a surprising result since family firms often score poorly on corporate governance metrics.

The presence or absence of a say-on-pay vote is generally consistent with a firm’s overall governance strength (or lack thereof). Indeed, when it comes to governance scores (which include such measures as board composition, compensation, shareholder rights and disclosure), adopters of say-on-pay scored 82.5 on average, while non-adopters scored 60.1 on average. Of the 45 firms having below average governance scores, only 28.9 per cent were adopters. Meanwhile, of the 55 firms having above average governance scores, 83.6 per cent were adopters.

There is a wide variation in adoption rates across industries. Table 4 provides an industry break-down of adopters and non-adopters, organized by adoption percentage.

Table 4 – Industry break-down of say-on-pay adopters versus non-adopters

Industry	Number of firms	Percentage of firms adopting say-on-pay	Percentage of firms not adopting say-on-pay
Health care	2	100.0%	0.0%
Industrials	5	100.0%	0.0%
Materials	17	82.4%	17.6%
Telecommunications	4	75.0%	25.0%
Financial	16	62.5%	37.5%
Consumer discretionary	7	57.1%	42.9%
Energy	25	52.0%	48.0%
Utilities	5	40.0%	60.0%
Consumer staples	8	37.5%	62.5%
Information technology	3	33.3%	66.7%
Real estate	8	25.0%	75.0%

Certain industries such as financials have achieved significantly higher adoption rates than others, such as real estate and consumer staples. In some cases, this intuitively makes sense. After all, when CIBC and Royal Bank of Canada led the adoption of say-on-pay by approving the policy in February 2009, the remaining big banks followed shortly thereafter. Nevertheless, no clear industry-wide consensus has emerged for say-on-pay in other industries such as energy.

Say-on-pay aims to rein in executive pay that shareholders view as excessive, pressuring the board to make pay more reasonable and better aligned with performance. But as you can see from Table 5, which details 2012 CEO compensation characteristics for adopters and non-adopters, executive compensation at adopting firms is actually higher on average in all categories. However, CEO compensation depends heavily on firm size. And since adopters are, on average, much larger than non-adopters, such higher compensation is expected.

Table 5 – 2012 CEO compensation characteristics of say-on-pay adopters versus non-adopters

Firm characteristic	Adopters	Non-adopters
Number of firms	59	41
Total reported compensation-average ($ millions)	$8.3	$4.3
Cash compensation:
Base salary-average ($ millions)	1.0 (12.0%)	0.9 (20.9%)
Bonus-average ($ millions)	1.5 (18.1%)	1.3 (30.2%)
Other cash compensation-average ($ millions)	0.9 (10.8%)	0.1 (2.3%)
Total cash compensation-average ($ millions)	3.4 (40.9%)	2.3 (53.5%)
Pension-average ($ millions)	0.4 (4.8%)	0.1 (2.3%)
Share/option-based compensation:
Share-based awards-average ($ millions)	2.9 (34.9%)	0.8 (18.6%)
Option-based awards-average ($ millions)	1.5 (18.1%)	1.0 (23.3%)
Total share/option-based comp. -average ($ millions)	4.4 (53.0%)	1.8 (41.9%)
Total at-risk pay-average (share/option + bonus) ($ millions)	5.9 (71.1%)	3.1 (72.1%)
Percentage receiving share-based awards	91.5%	58.1%
Percentage receiving option awards	76.3%	62.8%

Source: The Globe and Mail

While pay levels vary between adopters and non-adopters primarily due to differences in firm size, stock-based compensation represents the greater proportion for adopters (53 per cent versus 41.9 per cent for non-adopters). Conversely, cash compensation represents a greater proportion of total pay for non-adopters (53.5 per cent versus 40.9 per cent for adopters). Further, the percentage of adopting firms providing share- and option-based pay (91.5 per cent and 76.3 per cent respectively) is much higher than non-adopting firms (58.1 per cent and 62.8 per cent respectively). Since many believe that stock-based compensation better aligns the interests of management and shareholders, instilling a longer-term perspective to decision making, the emphasis of adopters on stock-based compensation may be considered a strong practice. However, non-adopters may require less stock-based compensation due to the greater proportion of family firms who have less of a separation between ownership and control.

 

Conclusion

Say-on-pay clearly represents a low-cost way of enhancing management’s accountability to shareholders. Before its arrival, shareholders lacked a specific mechanism to voice their opinions on executive pay packages. When a pay package was deemed excessive, shareholders could only vote against the re-election of compensation committee board members. This meant that shareholder retaliation for excessive pay packages was non-specific and often indistinguishable from general disapproval of the board as a whole. If shareholders were particularly enraged, they might send a letter of complaint to the board—but unless their voice carried considerable heft, their concerns would often go unheard.

Even though the effectiveness of this mechanism is still being established, there is little evidence of frivolous use. To date, in fact, most votes have been positive, with the 2012 average approval rating being over 90 per cent in Canada, the US and the UK.

Since all but the most egregious pay practices are typically approved, the concern of uneducated shareholder activism appears limited. Negative outcomes, however, still provide benchmarks for what practices are deemed as unacceptable by shareholders and therefore serve as a valuable deterrent for controversial pay practices, even when votes are non-binding.

Following the Barrick vote, for example, more Canadian companies will think twice before paying out large signing bonuses to non-executive directors.

While say-on-pay votes will not prevent all abusive compensation practices, mandatory votes avoid the possibility of abusive firms opting out of this potentially positive mechanism. Moreover, when companies can choose whether or not to adopt say-on-pay, the firms most needing improved governance can easily avoid the pressure to change. As a result, by not mandating say-on-pay votes for public companies, Canada is falling behind its peers and sending the message that corporate governance practices are unimportant. This decreases Canada’s international credibility as a haven for safe investment, which is why securities regulators in Canada should act quickly to adopt mandatory say-on-pay.