people at annual general meeting

Activist shareholders haven’t given up on their long-standing concerns, such as executive compensation and corporate sustainability. This year, a new issue has emerged in the annual shareholder proposals being put before the big banks’ shareholders – the existential threat posed by technology to the banks’ business.

In this year’s crop of shareholder proposals, Montreal-based shareholder advocacy group Mouvement d’éducation et de défense des actionnaires (MEDAC) is calling on most of the big banks (with the exception of Toronto-Dominion Bank [TD]) to create new board committees that are devoted to technology and its potential to disrupt the banks’ business.

MEDAC is recommending that the banks’ boards start treating tech-driven innovation as a critical risk to their business. The group argues that, while the banks’ boards have stepped up their recruiting of directors with tech expertise, and are enhancing their other directors’ technological knowledge generally, they need board-level committees devoted to the issue.

“It is worth recalling that, until about 10 years ago, risk committees did not exist, yet their added value has since been demonstrated and is now recognized,” the group states in its proposals. “The pace of change in technology is a matter of concern and constitutes a threat that requires the special attention provided by the creation of a committee.”

As is usually the case with shareholder proposals, all banks are recommending their shareholders vote against the MEDAC proposal. In their proxy circulars, they argue that they are already appropriately focused on the impact of technology in the financial services industry, and that new board committees aren’t required.

Canadian Imperial Bank of Commerce (CIBC), for example, says that its full board oversees the bank’s technology strategy, and that it believes “this level of oversight is in the best interests of CIBC given the breadth of technology’s impact; the significance of technology to transforming banking operations, services and products; and the pace of technological change.”

These sentiments are generally echoed by the other big banks, which maintain that the impact of innovation is so important that it should be considered by the entire board.

Royal Bank of Canada (RBC) indicates in its proxy that it considered creating a board-level technology committee a couple of years ago, but that the idea was ultimately rejected, stating: “The board concluded that overseeing the bank’s technology, digital and innovation strategies across all businesses was fundamental to the board’s role in this time of secular change to ensure the long-term strategic success of RBC and that the creation of a new committee would be unnecessary.”

Additionally, RBC says, the creation of a new board committee would require it to expand the board’s size, potentially hampering its overall effectiveness.

MEDAC’s call for the banks to launch tech-focused board committees isn’t the only shareholder proposal that will be up for consideration at the banks’ annual meetings this year. The group also has a more traditional corporate governance issue on its agenda, once again calling on the banks to disclose the ratio of their CEOs’ compensation to that of the average bank employee – a metric often referred to as the “pay ratio.”

In the U.S., the Securities and Exchange Commission (SEC) has begun to require public companies to provide pay ratio disclosure. MEDAC argues that the big Canadian banks also should be doing so.

The group says that pay ratio disclosure would demonstrate whether the compensation of senior executives and the rest of the banks’ employees are moving in the same direction, which, it says, “would help shareholders determine whether the compensation paid to the management team is socially acceptable and does not negatively impact its reputation.”

This is not a new issue for MEDAC, which has called for pay ratio disclosure in the past. But, in the wake of the SEC requiring disclosure in the U.S., it’s hoping the issue will start to gain traction with the Canadian banks, too.

Yet again, the banks are recommending that shareholders reject the resolutions on pay ratio disclosure. While some of the banks say their compensation committees consider the pay ratio as one of many factors that go into setting CEO compensation, TD says that it doesn’t use a pay ratio, because it is not a “meaningful tool” for setting CEO pay. TD adds that “results can vary significantly based on the business mix, employee base and geographies of operations of a particular organization.”

A couple of other banks point out that there’s no standardized methodology for calculating the pay ratio, which limits its usefulness. And RBC says that voluntarily providing this sort of disclosure could negatively affect its human resources efforts.

“In the absence of disclosure requirements for Canadian issuers, voluntary disclosure of internal pay ratios could present significant competitive concerns for our ability to attract and retain executives,” RBC states, noting that previous shareholder resolutions on this issue have attracted relatively little support.

Bank of Montreal (BMO) is the most conciliatory among the banks on this issue. BMO says that, while the lack of an accepted methodology represents a flaw in pay ratio disclosure, and it doesn’t directly report this statistic itself, the bank is now disclosing information that will enable interested shareholders to calculate the ratio for themselves.

“As an organization,” BMO states, “we are also committed to providing this information on an ongoing basis.”

MEDAC has put forward a couple of other shareholder proposals to various banks that have since been withdrawn, but are nevertheless set out in this year’s proxies. These include a resolution calling on the banks to incorporate environmental, social and governance factors into their executive compensation decisions, and a proposal demanding that they report on their efforts to support the transition to a low-carbon economy. These proposals are being withdrawn after discussions between the group and the banks, largely because the banks have already started to adopt these practices.

MEDAC isn’t the only source of shareholder proposals for the banks this year, however. TD shareholders also will be considering a resolution filed by an individual investor regarding greenhouse gas emissions, and the bank’s role in providing financing for energy industry projects that produce significant emissions. Among other measures, it calls on the bank to stop financing these sorts of projects, and to start divesting itself of existing projects that produce large emissions.

Additionally, Bank of Nova Scotia has a proposal from California-based Harrington Investments Inc., which demands the bank revise its internal policies to ensure that human rights are considered in its lending and project financing decisions. The bank is recommending that shareholders reject the proposal on the basis that its concerns have already been addressed by the bank in recent revisions to its human rights policies.

RBC reports that it received a proposal from the Atkinson Foundation, a Toronto-based charity that advocates for social and economic justice, calling on the bank to enhance its disclosure about its use of temporary and contract workers, along with its overall approach to labour-related risks. However, RBC reports that the proposal was withdrawn based on the bank’s commitment to provide additional disclosure about its workforce and employee complaints.