Giving Shareholders a Say on Pay

A measure leading to better governance?

At a time when several Canadian financial institutions are about to hold a non-binding shareholder vote on executive compensation, the Institute for Governance of Private and Public Organizations (IGPPO) states in a position paper made public  that this process should not be imposed on all publicly traded companies.

“The arguments pros and cons a non-binding vote by shareholders on executive compensation do not readily tip the balance in one direction or the other. The sense of unfairness and the frustration with some patent cases of excessive compensation have generated a good deal of sympathy for more direct and vigorous measures to curb extravagant compensation practices. Nevertheless, boards of directors fully responsible and accountable for the governance of publicly traded corporations do form the cornerstone of our system of corporate governance.” says Yvan Allaire, the IGPPO’s chairman.

“Say-on-pay voting by shareholders may indeed persuade more companies to hold consultations with important shareholders on executive compensation prior to annual meetings. Of course, such consultations are already possible and have been held for a good while with many companies. However, it is claimed that without the threat of a formal (and possibly negative) vote by shareholders, consultations are less effective” adds Allaire

However, “the call for a non-binding, shareholder vote on executive compensation is a small but significant shift in responsibility for corporate governance away from boards of directors towards shareholder. If corporate boards cannot be trusted to make the right decision on executive compensation, how can shareholders rely on their judgment for other equally important decisions?” says Allaire.

For their next annual meeting of shareholders, several financial institutions have submitted to a vote by shareholders the approach that the compensation committee took to set executive compensation. This process was preceded, presumably, by consultations between large shareholders and members of the boards of directors of these companies.

“Yet, should the approach result in large, indefensible compensation some years hence, no one could complain as shareholders formally approved the process leading to these compensations” adds the IGPPO’s general manager Michel Nadeau

“In the specific cases of unsatisfactory compensation practices, institutional investors should propose a say-on-pay vote by shareholders in the future as a deterrent and a form of punishment for delinquent boards. Ultimately, investors should be prepared to use their right to vote (or “withhold” their votes) against specific directors in the few cases where board members have clearly failed to act in a responsible manner. “ says Allaire.

“A shareholder non-binding vote on compensations would foster a tighter link between executive performance and their compensation, it is claimed; and this link should be expressed in quantified, measurable terms to demonstrate to shareholders that executives do deserve their compensation. However the performance of effective, high level executives may not be fully captured by quantitative measures. Boards of directors need to show judgment when evaluating an executive’s performance” adds Nadeau.