2008 Proxy Preview: Canada
Submitted by: L. Reed Walton, Publications
Shareholders in Canada have filed several new proposals at this year’s bank meetings that seek greater executive pay accountability, greater disclosure of investments in hedge funds and subprime mortgages, and rewards for long-term holders.
As the 2008 proxy season unfolds, shareholder proposals concerning climate change risk, environmental performance, and sustainability reporting will also be considered by shareholders at a number of other Canadian companies.
Executive compensation is a perennial topic of concern--mostly at the large national banks where CEO pay is highest--but this is the first year that Canadian companies are facing advisory vote resolutions from Canadian investors, according to RiskMetrics data.
This year, 16 advisory vote measures--known as “say on pay”--were submitted to companies in Canada, according to the Vancouver-based Shareholder Association for Research and Education (SHARE), which keeps a database of proposals and vote results each year.
Overall, investors have filed 139 resolutions at 22 Canadian companies so far this year, up from 97 proposals in 2007, SHARE reports. By comparison, investors in the much-larger U.S. market have submitted more than 550 resolutions this season, according to RiskMetrics data.
Unlike U.S. Securities and Exchange Commission rules, Canadian law allows shareholders to file multiple resolutions at the same company and permits proposals on similar topics. The vast majority--96 in total--of this season’s resolutions were filed by the prolific Montréal-based investor group MEDAC (Mouvement d’Education et de Défense des Actionnaires, or the Shareholder Education and Defense Movement).
Most of the advisory vote proposals were filed at large Canadian financial companies--which receive the bulk of shareholder resolutions each year and generally hold their annual meetings in late February or March. The remaining resolutions were submitted at large-cap firms like Montréal-based aircraft maker Bombardier and BCE, a telecom company set to be taken private.
Cambridge, Ontario-based Meritas Mutual Funds--a social investment group--submitted a non-binding “say on pay” resolution to five major banks, the Canadian Imperial Bank of Commerce, Bank of Nova Scotia, Bank of Montréal, Toronto Dominion Bank, and the Royal Bank of Canada.
Those companies and several other firms also received a MEDAC “say on pay” proposal that would be binding if approved. In the resolution, MEDAC notes that a number of “say on pay” proposals received majority or near-majority support in the U.S. market last year.
The 2008 resolutions are not likely to fare as well at Canadian companies, however, as Canadian shareholder proposals typically get significantly lower support than those in the U.S. Of the 70 proposals to go to a vote in 2007, the average support was 6.9 percent, according to SHARE. That average doesn’t include a proposal asking National Bank of Canada to identify its compensation consultants, which was backed by management and received 80.6 percent support.
In 2006, the American Federation of State, County, and Municipal Employees, and the Milwaukee, Wis.-based Catholic Equity Fund both filed “say on pay” proposals at Merrill Lynch Canada. The two resolutions averaged 22.3 percent support. No advisory vote proposals were filed in Canada by either Canadian or U.S. investors in 2007.
It remains to be seen what support the proposals this year will receive in light of a report by the Canadian Coalition for Good Governance (CCGG)--an influential institutional investor group with 48 members managing a total of C$1.4 trillion in assets--stating that now is not the appropriate time to adopt advisory pay votes in the Canadian market.
The CCGG report cited various reforms that companies have adopted in recent years. Seventy-two firms have instituted director-resignation policies, while other companies have abolished slate voting in board elections and hired independent executive pay advisors. The coalition also noted that the country’s provincial securities regulators, which make up the Canadian Securities Administrators (CSA), are planning to release revised, more comprehensive pay disclosure rules in March or April that would go into effect for companies with fiscal years ending on or after Dec. 31, 2008.
Because of these reasons, the CCGG said it would not press legislators to require companies to hold “say on pay” votes, despite calls by some investors. “We will look to corporate Canada to continue to improve the executive compensation process … if we feel progress on this issue has stalled, we may support resolutions such as ‘say on pay,’” David Beatty, CCGG’s managing director, said in a Jan. 7 press release about the report.
Instead, the CCGG wants directors to continue to take an active role in increasing pay disclosure. “Our feeling is that boards are trying to do a much better job of it, but they can use further education with respect to best practices,” Beatty told R&GW.
The CCGG releases annual reports on best practices for compensation disclosure and other governance issues on the coalition’s Web site. Some of the companies that have received compensation proposals this year, such as Manulife Financial and Bombardier, are cited by the group for having exemplary compensation disclosure.
SHARE, which counts “say on pay” proponent Meritas among its clients, disagrees with the CCGG stance. Laura O’Neill, SHARE’s director of law and policy, told Risk & Governance Weekly that other SHARE members support pay votes.
Other Compensation Proposals
So far, investors have filed 40 pay-related resolutions, about the same as last year, according to SHARE. Most of the compensation proposals for 2008, however, differ from those filed in 2007.
Last year, eight companies were asked by MEDAC to tie executive stock option awards to each firm’s “Economic Value Added” measurement. Those proposals received an average of 3.8 percent support. MEDAC did not re-file that proposal this year, but the group is asking 11 firms--mostly the large banks--to bar executives from exercising options until they leave the company.
MEDAC also declined to re-file a proposal requesting a link between executive compensation and the average salary of company employees. The proposal averaged 3.2 percent support in 2007.
Resubmission thresholds for investor proposals are the same in Canada as they are in the U.S.; a proposal must receive 3 percent support in its first year to be resubmitted
This year, MEDAC instead is asking 11 companies for disclosure on the disparity between executive compensation and the salaries of average workers. Proposals requesting additional disclosure usually fare better in Canada than those asking for specific governance changes, O’Neill of SHARE told R&GW.
For instance, in 2007, a proposal by MEDAC asking for disclosure of compensation consultants won an average of 8.44 percent support at six meetings. According to a Jan. 21 CCGG report, around 40 percent of companies did not disclose the names of their compensation consultants in 2007, and 36 percent did not say whether they retained one.
According to Canadian news reports, MEDAC successfully convinced many of the country’s banks in 2000 to disclose the fees that audit firms are paid for consulting and other non-audit services. The investor group hopes to have the same success with disclosure surrounding compensation consultants.
So far, investors have not filed any proposals to limit supplemental executive retirement plan (SERP) benefits, but those resolutions fared well last year. In May 2007, proposals filed by the Carpenters’ Local 27 Pension Trust won more than 41 percent support at Manulife Financial and Finning International, despite management opposition, according to SHARE.
Another novel MEDAC proposal this season asks the banks and large companies to pay out twice the amount of severance pay and bonuses received by departing executives into employee pension funds in the case of a merger or acquisition.
The proposal, even if it won significant support, would likely not have much impact at the Canadian banks. The Canadian government denied two proposed domestic bank mergers in the 1990s, and it currently limits ownership stakes in the large chartered banks to 20 percent or less. However, the proposal might attact more investor interest if the federal government decides to repeal these restrictions, as it has been urged to do this year by the Canadian Bankers Association (CBA).
“A merger or acquisition is a very legitimate business transaction that is available to any other business in Canada … so the fact that it is denied to banks really doesn’t make any sense,” Nancy Hughes-Anthony, the CBA president, told the Reuters news service on Jan. 10.
The administration of Prime Minister Stephen Harper, though, has repeatedly said that it does not consider bank mergers a priority, Reuters reported.
Long-Term Shareholder Benefits
Investors also have filed new resolutions that seek to reward long-term shareholders for their loyalty. MEDAC has submitted two proposals--each to the same 11 companies--angling for greater benefits for those mostly institutional investors who tend to hold stocks longer.
The first proposal asks companies to increase dividends for long-term shareholders, and the second requests that companies grant voting rights only to those investors who have held shares for a year or longer.
The proposals were written “in order to put some handicaps on traders that are trying to make a fast buck or to [exert] influence by buying a lot of shares in order to beat or approve some proposals by shareholders,” MEDAC Founding President Yves Michaud told the Toronto-based Globe and Mail in October after the proposals were filed.
O’Neill told R&GW that SHARE supports the idea of encouraging long-term investment but cannot support MEDAC’s proposals because they go against the association’s fundamental good governance principle of “one share, one vote.”
“I think directionally it’s interesting, because our members tend to be long-term shareholders,” Beatty of the CCGG told R&GW. However, the CCGG is not taking a stance on the loyalty dividend issue this year, focusing instead on improving compensation disclosure.
Under Canadian Bank Act restrictions, neither proposal is possible in actual practice as the law requires equal treatment of common shareholders of Canadian banks.
Mortgage-Related Proposals
Because the collapse of the U.S. subprime mortgage market and resulting credit crunch have global implications, institutional and individual shareholders in Canada have filed new proposals that seek greater disclosure of holdings in collateralized debt and the American mortgage market.
Through early 2007, a number of Canadian banks invested in the soaring real estate market of their neighbor to the south, buying asset-backed commercial paper (ABCP) or short-term investment vehicles that were supported in part by mortgage assets.
Much ABCP is issued by banks, but the non-bank-issued bonds--accounting for about C$40 billion, according to the Financial Post--began to plummet when the mortgage market went into decline. Issuers could not find buyers for new debt, and therefore could not afford to pay investors whose paper had matured.
Trading in the non-bank ABCP market in the country has been effectively frozen since August, when 10 major Canadian financial institutions agreed to stop trading in order to convert the ABCP into longer-term debt to increase market liquidity. Investors are concerned, the Canadian press reports, that the trouble will begin to spill into bank-issued ABCP.
Several companies, including National Bank of Canada and health insurer Industrial Alliance, have formulated plans to buy back tens of millions of dollars of ABCP from investors, according to news reports.
MEDAC, which submitted a proposal last year asking banks and larger Canadian companies to disclose their dealings with hedge funds, has revised the resolution this year to ask for disclosure of ABCP investments as well. The hedge fund proposal averaged 12.5 percent support over six meetings, which was among the best showings by a shareholder resolution topic in 2007.
Editor’s note: Unless otherwise noted, all vote results for 2007 are based on SHARE data.
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