This article appears in the April 2021 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.
Canada lags the U.S., France, Switzerland, Australia and other countries in adopting so-called “say on pay” legislation, but that may soon change.
In Canada, say on pay — the practice of allowing shareholders to vote on executive compensation — is voluntary. However, 220 public companies have adopted the practice, including more than 71% of companies in the S&P/TSX composite index, according to a 2019 report from the Shareholder Association for Research and Education.
On March 31, Corporations Canada concluded public consultations on proposed say-on-pay regulations under the Canada Business Corporations Act. The proposal would see corporations hold a mandatory, non-binding say-on-pay vote at each annual general meeting.
While companies wouldn’t have to act on the results of these votes, their boards would at least have to “pay attention to the message that the shareholders are sending” about executive compensation, said Catherine McCall, executive director of the Canadian Coalition for Good Governance (CCGG). “Currently, most of the companies that are interested in best practices give their shareholders a say-on-pay vote.”
And a growing number of investors are interested in having their say, said Alon Segev, managing partner with Segev LLP, a law firm in Vancouver.
“I think a lot of people are really pushing for [say on pay], and a large part of that is coming from the inequality that we’re seeing in wages,” Segev said. “People are looking for greater transparency as well.”
Still, not all companies are on board with the idea of giving shareholders a vote on executive compensation, Segev noted.
“People are debating the pros and cons right now,” Segev said. “One of the cons argued is that shareholders aren’t sophisticated enough to determine appropriate compensation levels and that directors of the company are in the best place to make that decision.”
Some companies hire headhunters to fill executive roles and argue that they must pay competitive rates to attract top talent, Segev added.
Corporations Canada sought comment on several elements of its proposals, including which companies they should apply to. The proposals would require all publicly traded companies — regardless of size — to adopt say-on-pay votes, but critics suggest smaller companies may have limited resources and find these votes too onerous.
However, McCall said a corporation’s size shouldn’t be a factor: “Companies should be thinking about the rationale [behind executive compensation] and explaining their decision-making processes to shareholders, no matter how big of a company they are.”
The Corporations Canada consultation also requested feedback on how and when companies should disclose the results of each vote, and whether a position is part of senior management. The proposals classify the chair and vice-chair of a company’s board as senior management, alongside executive officers and vice-presidents.
The CCGG, however, argues that chairs and vice-chairs are intended to be positions independent of executive officers and vice-presidents.
Executive compensation generally falls under the environmental, social and governance (ESG) framework that portfolio managers use to assess a company.
TD Asset Management Inc. (TDAM), for example, assesses a company’s compensation and pay practices alongside the ownership structure of the firm, board composition and accounting practices, said Priti Shokeen, TDAM’s vice-president and head of ESG research and engagement.
“Analyzing executive compensation is important to investors because it gives insight into whether management’s incentives are aligned with shareholder interests,” Shokeen said.
This analysis isn’t just about the amount executives are paid, but also how their pay is structured based on short- and long-term incentives, Shokeen added. There’s also growing interest in how executive compensation compares with what a company pays its employees.
“Increasingly, some ESG investors have also started looking at the difference between highest- and lowest-paid company employees from a social equity perspective, especially when it comes to ESG [investment] funds,” Shokeen said.
Still, while executive compensation is an important factor in measuring ESG, it isn’t the deciding factor when making an investment, said Kim Desmarais, analyst, responsible investing with Montreal-based Desjardins Global Asset Management Inc. (DGAM).
“But sometimes poor disclosure on executive compensation, the absence of a say-on-pay vote or concern over pay practices will prevent a company from being put on a best-in-class investment list,” Desmarais said, explaining DGAM’s process. “Boards and executives have to take into consideration what their shareholders and stakeholders expect from them, and align their strategy with it.”