The Advisors' Blog

– Julie Scott, RiskMetrics’ Canadian Research Team

Nine of the 13 Canadian companies that will give shareholders their first vote on executive compensation have agreed in principle on a draft resolution that will appear on proxy ballots in 2010. The resolution is drawn from a draft model “say on pay” policy crafted by the Canadian Coalition for Good Governance (CCGG), which represents 41 investors managing over $1 trillion in assets.

The CCGG, which drafted its model policy in consultation with Canadian issuers, has urged companies to standardize their “say on pay” policies. While the board will decide the final wording of the proposal in the proxy circular, the nine companies are expected to recommend the CCGG’s draft.

“A lot of drafting and consultation went into this policy,” CCGG director of research Paul Schneider told Risk & Governance Weekly.

The draft resolution is prefaced by a statement noting that the purpose of the “say on pay” vote is to ensure directors are accountable for their compensation decisions. While shareholders provide their collective advisory vote on compensation, directors remain fully responsible for investment decisions. The draft policy suggests the following wording for the say on pay resolution: “Resolved, on an advisory basis and not to diminish the role and responsibilities of the board of directors, that the shareholders accept the approach to executive compensation disclosed in the Company’s information circular delivered in advance of the [insert year] annual meeting of shareholders.”

The CCGG’s model policy states that say on pay resolutions should be seen as part of ongoing engagement efforts between companies and shareholders. At the heart of the policy is the board’s belief that it is important to have regular and constructive dialogue with shareholders. The model policy provides examples of how to elicit feedback, including through meetings between boards and shareholders, investor surveys, town hall meetings, and web-based tools enabling shareholders to ask questions of the board.

The model policy also addresses the question of how the board responds to the results of the say on pay vote. The policy states that companies will disclose the results of pay votes and take the results into account when considering future compensation policies. In the event that a “significant” number of shareholders oppose the resolution, the policy states the board will further consult with shareholders to discuss specific concerns. The company will then disclose, no later than in the proxy circular for the next shareholders’ meeting, a summary of the comments from shareholders and any subsequent changes to compensation policies.

The draft policy does not specify the level of opposition to a “say on pay” resolution which would be considered significant and would prompt the company to consult further with shareholders. The CCGG appears to prefer a case-by-case approach to analyzing against votes, taking into account the shareholder base of each company.

While shareholder proposals filed in 2009 calling for advisory pay votes are largely responsible for prompting the 13 Canadian issuers to provide for the right, the CCGG’s policy urges companies to adopt the vote voluntarily. The Shareholder Association for Research & Education (SHARE), which filed “say on pay” proposals on behalf of Meritas Mutual Funds in 2009, continues to engage with companies on the subject of advisory pay votes. SHARE officials tell RiskMetrics they have contacted about 30 companies since 2007 to recommend adopting a say on pay advisory vote. Of the 13 companies that have committed to a say on pay vote in 2010, Canadian Imperial Bank of Commerce has the earliest meeting date of Feb. 25. The CCGG encouraged interested parties to submit comments on its draft Model Say on Pay Policy by Nov. 25.