Risk & Governance Weekly

August 8, 2008

Proxy Season Review: Canada

By L. Reed Walton

Canadian shareholders submitted a record number of proposals this year, and there was unprecedented support for several resolutions seeking an advisory vote on executive pay.  

“Say on pay” proposals--submitted for the first time by domestic investors at Canadian firms this year--earned more than 40 percent support at three financial companies, a remarkable showing given the historically low support received by most shareholder proposals in Canada. 

According to the Shareholder Association for Research and Education (SHARE), investors submitted 174 proposals--the most since the group started tracking Canadian shareholder proposal filings in 2000. Thirty of those proposals related to executive compensation, about the same as last year. SHARE Executive Director Peter Chapman told Risk & Governance Weekly that the volume of shareholder proposals fluctuates each year because the right to file is governed by the laws of Canada's 13 provinces and territories. For instance, Chapman said, the province of Alberta has just instituted laws that make it much more difficult to file resolutions at Alberta-incorporated companies.

The number of resolutions is still notable, said Paul Schneider, director of research at another key Canadian investor group, the Canadian Coalition for Good Governance (CCGG). “If the quantity [of investor proposals] is up, it means … shareholders are becoming more interested and active in the process,” Schneider told R&GW.

Of the 174 proposals filed, 29 were withdrawn by their proponents. As in the U.S., proponents often will withdraw a proposal after reaching an agreement by the company to adopt specific reforms or continue to discuss the topic. Fewer than 10 proposals were not included by the company on the proxy circular. Canada does not have a formal process for companies to seek permission from regulators to omit proposals. Shareholders’ only recourse if a proposal is left off the ballot is to take the company to court, though this is costly and therefore unlikely.

“Say on pay” resolutions submitted by Ontario-based social investor Meritas Mutual Funds averaged 40.5 percent support at five meetings this year. Like most shareholder proposals in Canada, the pay vote resolutions were submitted at major banking firms, which are the country’s largest companies and receive the most scrutiny. All of the proposals were opposed by company management. Before this year, only five management-opposed proposals have won over 40 percent support in Canada since 2004, according to SHARE.

The best showing for “say on pay” was 45 percent support at the Canadian Imperial Bank of Commerce (CIBC). Board Chairman William Etherington said after the bank’s Feb. 28 meeting that the board would continue a dialogue with pay vote advocates, though no Canadian company has thus far agreed to hold a yearly vote on compensation.

In 2006, the first year that pay vote resolutions were filed in the U.S., no companies adopted “say on pay,” though insurance firm Aflac committed to holding a vote shortly after receiving a pay vote proposal for 2007. Since then, eight other American companies have committed to holding annual non-binding votes on executive compensation. Legislation to require U.S. firms to hold advisory votes passed the House of Representatives last year, but its sister bill is stalled in the Senate while lead sponsor Senator Barack Obama of Illinois campaigns for the presidency.  

The Toronto-based CCGG announced early this year that it would not press Canadian lawmakers to pursue a nationwide pay vote law. The CCGG declined to support “say on pay” in 2008 in part to study the effects of new compensation disclosure rules by the Canadian Securities Administrators (CSA). The CSA hopes to have the rules, for which a comment period ended in April, take effect by Dec. 31. The board of the CCGG will re-examine its stance on pay policies, including “say on pay,” for 2009, Schneider told R&GW, but he said that he could not estimate when the coalition’s revised governance guidelines would be released.

Another pay vote resolution--one that would require prior shareholder approval of pay packages for a company’s top five executives and directors--fared less well this year. The resolution, sponsored by Montréal investor group MEDAC (Mouvement d’Education et de Défense des Actionnaires), averaged 3.8 percent support over 10 meetings. MEDAC submitted the proposal at all of the firms that received the Meritas pay proposal as well as two additional banks and two companies in other sectors.

Telecom firm BCE, which also received the MEDAC “say on pay” proposal, is in the process of completing a $52 billion going-private transaction and has not held a shareholder meeting this year. The BCE buyout also was the subject of a landmark Canadian Supreme Court case over the rights of investors and bondholders. (For more details, see the June 27 edition of R&GW.) 

Other Pay Proposals

MEDAC and individual shareholder Robert Verdun submitted most of the other pay-related proposals at Canadian firms this year. Several new resolutions went to a vote, but none received close to the average support won by the Meritas “say on pay” measures. Support for governance proposals is typically much higher in the United States than in Canada, where it is common for resolutions to receive less than 10 percent support, especially in their first year.

MEDAC put forward a new proposal this year asking companies to disclose the ratio of compensation earned by the highest-paid executive to the average employee salary at the company. The resolution averaged 5.6 percent support over nine meetings. Last year, MEDAC submitted a similar proposal, but instead of disclosure, it asked for a link between executive compensation and average worker pay. The resolution received an average of 3.2 percent support over eight meetings.

Another new MEDAC proposal, which requested that companies prohibit executives from exercising stock options until the end of their tenure with the company, averaged 3.6 percent support over nine meetings. Verdun submitted a proposal asking companies to award most of the compensation to their executives in the form of gift “credits” to charity organizations. The executives would then give these funds to the charities after their retirement. The measure received only 1.8 percent support over five meetings. Another Verdun proposal asking firms to re-examine their pay disclosures for adherence to compensation disclosure rules averaged 3.5 percent support at three meetings.

The United Brotherhood of Carpenters and Joiners of America’s Ontario-based Local 27 pension fund again submitted a proposal calling for limits on supplemental executive retirement plans (SERPs). The resolution, asking that companies exclude bonuses and additional years of service from supplemental plan calculations, averaged 11.3 percent support over four meetings this year. The highest vote was 25.3 percent support at British Columbia-based paper and pulp company Catalyst. Last year, Carpenters filed the proposal at three firms, withdrawing from one. The proposal garnered more than 40 percent at Manulife Financial and Finning International in 2007.

Market-Specific Proposals

Shareholder concerns over hedge fund involvement and the possible effects of short-term investors on companies spurred a number of proposals this year. The Carpenters filed six proposals asking that voting rights for investors holding stock for three years or more be doubled. However, the union pension fund withdrew the resolution at five companies (it was not included on the ballot at aircraft manufacturer Bombardier), suggesting an agreement with the firms. The Carpenters could not be reached by press time to confirm that they had reached settlements on this issue with the companies.

MEDAC sponsored two enhanced voting-rights proposals this year, one asking that voting rights be given only to those who hold stock for a year or more, and another requesting increased dividends for longer-term investors. Both proposals averaged 1.4 percent support over 10 meetings. Even if the measures had won support, the large banks would not be permitted to adopt either, under Canada's Bank Act.

Canadian shareholders have asked companies for the past two years to disclose their participation in hedge fund investments. Last year, the resolution--sponsored by MEDAC--won a notable 12.5 percent support across six meetings. This year, MEDAC also asked companies to disclose participation in financial instruments backed by subprime or high risk mortgages. These proposals averaged 12.6 percent support at nine meetings, consistent with the 2007 results.

Board-Related Proposals

Just as in the U.S., the push toward majority voting in director elections continues in Canada. Since 2005, when the CCGG endorsed majority voting, about 78 Canadian firms have announced voluntary adoption of a “majority vote” policy that complies with the CCGG recommendations. The policies are not majority-vote bylaws, but director resignation policies combined with plurality voting--like the approach pioneered by U.S. drug company Pfizer in 2005.

Some companies, like fertilizer manufacturer Agrium and energy company Nexen, have codified their director resignation policies. Nortel, a communications firm, requires that directors receive three-quarters of the votes cast. This is the first year in Canada that investors have submitted proposals requesting an article amendment or bylaw change to require majority voting. These measures, by the Carpenters, averaged 10.1 percent support, including a 16.3 percent vote at Nexen.

Canadian companies present a number of unusual circumstances, however. Of the 231 companies in the S&P/TSX (Toronto Stock Exchange) Composite Index covered by RiskMetrics, 100 still have slate ballots, meaning that investors cannot vote for directors individually. No individual-election proposals were submitted this year, though one was withdrawn in 2007 by proponents who reached an agreement with Power Corporation of Canada. Some Canadian companies also have controlling shareholders, but a few firms have changed their bylaws to take this into account. ING Canada, whose parent company owns 70 percent of the common stock, requires directors to win greater than 85 percent support.

Cumulative voting resolutions filed by MEDAC averaged 7.5 percent support at nine companies this year. Before this year, the last cumulative voting proposal was filed in 2006 at Merrill Lynch Canada. It received a 43.5 percent vote, but the proponent was American and most of those voting were U.S. investors as well, according to SHARE.

There were several proposals submitted again this year asking for greater gender parity on the board of directors. The resolutions, sponsored by MEDAC, averaged 6 percent support at nine meetings--about the same support as last year.

RiskMetrics Group’s Canadian Corporate Governance Team contributed to this report. All vote results are according to SHARE, unless stated otherwise.