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	<title>IGOPPSay on Pay &#8211; IGOPP</title>
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		<title>Shopify and the Problem of Shareholder “Approval” at Multi-Class Companies</title>
		<link>https://igopp.org/en/shopify-and-the-problem-of-shareholder-approval-at-multi-class-companies/</link>
		<comments>https://igopp.org/en/shopify-and-the-problem-of-shareholder-approval-at-multi-class-companies/#respond</comments>
		<pubDate>Wed, 07 Aug 2024 14:32:54 +0000</pubDate>
		<dc:creator><![CDATA[IGOPP Site web]]></dc:creator>
				<category><![CDATA[IGOPP in the Medias]]></category>
		<category><![CDATA[IGOPP in the medias]]></category>
		<category><![CDATA[Dual-class shares]]></category>
		<category><![CDATA[Proxy Advisors]]></category>
		<category><![CDATA[Say on Pay]]></category>

		<guid isPermaLink="false">https://igopp.org/shopify-and-the-problem-of-shareholder-approval-at-multi-class-companies/</guid>
		<description><![CDATA[Media reporting can make proxy season seem more dramatic than it is. While breathless coverage of board strife, impossibly high executive pay figures and shareholder activism at well-known companies is the norm, the overwhelming majority of director election and executive compensation proposals pass with majorities of 90% and upwards. The handful of proposals that fail [&#8230;]]]></description>
		<content><![CDATA[Media reporting can make proxy season seem more dramatic than it is. While breathless coverage of board strife, impossibly high executive pay figures and shareholder activism at well-known companies is the norm, the overwhelming majority of director election and executive compensation proposals pass with majorities of 90% and upwards.

The handful of proposals that fail understandably draw headlines – yet many proposals opposed by a majority of shareholders fly under the radar. That’s because (with some notable exceptions [1]) most reporting fails to acknowledge how multi-class share structures, which give certain shares typically held by founders and insiders more voting power than those held by institutional and retail investors, obscure investor sentiment.

Proxy voting is highly technical in and of itself, and its ultimate influence on how companies are run is even more complicated. So why does the impact of multi-class share structures matter? Because giving insiders and founders disproportionate voting power often serves to effectively silence ordinary shareholders, threatens the agency and objectivity of the board and removes a key safeguard against excessive pay, related party transactions, and other potential misuses of investor capital.

In this post, we look at how inequitable voting rights influenced 2024 AGM results at Shopify, and at the broader impact of multi-class share structures on the board and its role.

Case Study: Shopify Inc.

Two years ago, Shopify controversially [2] implemented a “founder share” that gave CEO Tobi Lutke 40% voting rights indefinitely, even if his actual economic stake in the company goes down as low as ~2%. A majority of the company’s shares were voted against this arrangement – but because not all of the company’s shares had the same voting power, the founder share was nonetheless granted to Lutke.

At the 2024 AGM, Shopify’s now-cemented triple-class share structure again swung the vote on several proposals. Yet, as in 2022, most media coverage of the general meeting painted an incomplete picture of the results. A Financial Post headline on the day of the meeting read [3] “Shopify shareholders approve executive pay plan they were urged to reject” while thelogic.co reported [4] “Shopify shareholders approve executive pay plan, rejecting proxy push.” Shopify’s subsequent filings announced that all agenda items had been approved.

Like two years ago, the word “approve” is doing a lot of lifting.

According to S&#38;P Capital IQ, institutional investors currently hold 815,336,783 shares in Shopify, or 63.3% of the economic exposure to the company’s share price performance. This translates into roughly 40% voting power, equivalent to that of the founder-CEO who only holds 6.2% of company’s total outstanding equity.

If the multi-class structure were collapsed and all shares voted on a one-to-one basis, the results indicate that well under half of shareholders supported the pay proposals, with support ranging from 34% for the option plan to 45% for the advisory say on pay. Meanwhile, we calculate that the re-election of director Gail Goodman would only have received 57% support.



[...]

Impact on Transparency

It’s notable that we had to perform the above calculations to untangle vote results ourselves. Even proponents of multi-class share structures, like the Institute for Governance of Private and Public Organizations (“IGOPP”) in Canada (see “Policy Paper No. 11: The Case for Dual-Class of Shares [5]”, 2019), call for companies to disclose a breakdown of their voting results so that shareholders can more easily isolate the effect of the superior voting shares. The failure to provide such disclosure indicates that companies see value in opacity, and that directors who effectively owe their seat to the grace of the CEO are not in a position to extract even modest concessions.

Read more [6]

[1] https://www.theglobeandmail.com/business/commentary/article-rbi-dentalcorp-nuvei-agm-shareholder-votes/
[2] https://www.glasslewis.com/shopify-shareholders-approve-controversial-founder-share-with-the-help-of-the-existing-multiple-voting-shares/
[3] https://financialpost.com/news/retail-marketing/shopify-shareholders-approve-executive-pay-plan
[4] https://thelogic.co/briefing/shopify-shareholders-approve-executive-pay-plan-rejecting-proxy-push/?synckey=1948957d-bee6-4d85-9c95-dee765098202%3Fwpa_error_token%3Dtrue
[5] https://igopp.org/en/the-case-for-dual-class-of-shares-2/
[6] https://igopp.org/wp-content/uploads/2024/08/GLASSL2.pdf]]></content>
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		<item>
		<title>Why Canadian CEO pay has soared over the past decade</title>
		<link>https://igopp.org/en/why-canadian-ceo-pay-has-soared-over-the-past-decade/</link>
		<comments>https://igopp.org/en/why-canadian-ceo-pay-has-soared-over-the-past-decade/#respond</comments>
		<pubDate>Thu, 21 Jun 2018 17:58:37 +0000</pubDate>
		<dc:creator><![CDATA[IGOPP Site web]]></dc:creator>
				<category><![CDATA[IGOPP in the Medias]]></category>
		<category><![CDATA[IGOPP in the medias]]></category>
		<category><![CDATA[Chief Executive Officer]]></category>
		<category><![CDATA[Executive compensation]]></category>
		<category><![CDATA[Proxy Advisors]]></category>
		<category><![CDATA[Say on Pay]]></category>

		<guid isPermaLink="false">https://igopp.org/?p=9990/</guid>
		<description><![CDATA[When shareholders of Canada’s big banks opened their proxy voting forms in early 2008, they found a striking new proposal on the ballot. Submitted by a small ethical mutual fund company, the resolution called on banks to give investors an annual vote on how executive pay was designed. Bank boards initially opposed the motion as [&#8230;]]]></description>
		<content><![CDATA[When shareholders of Canada’s big banks opened their proxy voting forms in early 2008, they found a striking new proposal on the ballot. Submitted by a small ethical mutual fund company, the resolution called on banks to give investors an annual vote on how executive pay was designed.

Bank boards initially opposed the motion as an intrusion into boards’ powers to set executive level pay. But within a year, a wave of companies bowed to pressure and agreed to introduce the votes, ushering in a decade of change in executive compensation design in Canada.

Since the financial crisis, measures have been introduced to increase transparency, better align executive returns with those enjoyed by shareholders and curb the worst excesses in chief executive pay.

[ ... ]

SHIFTING PERFORMANCE GOALS

The shift into share units over the past decade also means that compensation rewards shorter-term performance, despite frequent discussion about the importance of focusing management on longer-term, sustainable growth. Stock options are typically exercisable over 10 years, creating a long time lag between granting and cashing out, while share units typically pay out in cash at the end of three years.

Whether an unintended consequence, or simply an unavoidable trade-off, the shift into share units has reduced the definition of “long-term” compensation.

Yvan Allaire, chair of the Institute for Governance of Private and Public Organizations who wrote a recent paper on pay trends, believes share units provide a medium-term incentive at best, and a muddled short-term incentive at worst.

With most CEOs getting share unit grants each year, a portion is also vesting each year, so executives never have a single discrete three-year performance cycle. Instead, the performance goals are constantly shifting as a new target comes to fruition each year.

His proposed solution is to offer one grant of units every three years, allowing the performance goals to play out before a new incentive is added.

[ ... ]

While many shareholders urge companies to tailor compensation programs to their own unique strategies and time horizons, boards complain it is risky to deviate from the pay models favoured by the proxy advisers.

“The incredible convergence in compensation systems across companies is absolutely mind-boggling,” said Mr. Allaire.

“You read them, and it’s almost the same text from one to the other. … We’ve converged on a process which has received the blessing of proxy advisers and large investors, and boards feel safe when they apply that particular process.”

Read more [1]

[1] https://www.theglobeandmail.com/business/careers/management/executive-compensation/article-canadian-ceo-pay-an-inside-look-at-soaring-compensation/]]></content>
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		<title>Willis Towers Watson offers 2018 say-on-pay snapshot</title>
		<link>https://igopp.org/en/willis-towers-watson-offers-2018-say-on-pay-snapshot/</link>
		<comments>https://igopp.org/en/willis-towers-watson-offers-2018-say-on-pay-snapshot/#respond</comments>
		<pubDate>Fri, 18 May 2018 15:25:59 +0000</pubDate>
		<dc:creator><![CDATA[IGOPP Site web]]></dc:creator>
				<category><![CDATA[IGOPP in the Medias]]></category>
		<category><![CDATA[IGOPP in the medias]]></category>
		<category><![CDATA[American governance]]></category>
		<category><![CDATA[Executive compensation]]></category>
		<category><![CDATA[Say on Pay]]></category>

		<guid isPermaLink="false">https://igopp.org/willis-towers-watson-offers-2018-say-on-pay-snapshot/</guid>
		<description><![CDATA[In this snapshot review by Willis Towers Watson of U.S. say-on-pay and other compensation-related votes, WTW found that average support for say on pay remained high at 91%.  In addition, where ISS identified “high” levels of concern leading to negative recommendations on say on pay, 84% related to pay-for-performance concerns (compared to 75% in 2017).  WTW analyzed the [&#8230;]]]></description>
		<content><![CDATA[In this snapshot review [1] by Willis Towers Watson of U.S. say-on-pay and other compensation-related votes, WTW found that average support for say on pay remained high at 91%.  In addition, where ISS identified “high” levels of concern leading to negative recommendations on say on pay, 84% related to pay-for-performance concerns (compared to 75% in 2017). 

WTW analyzed the results of annual meeting votes for 740 companies in the Russell 3000 from January 1, 2018 through May 11, 2018 and compared them against results for the full 2017 year for 2338 companies in the Russell 3000.  WTW found that the success rate for say on pay has stayed flat at 91%, with a failure rate of 2% so far in 2018, compared to 1% in 2017. According to WTW, ISS gave 10% of the say-on-pay proposals negative vote recommendations, compared to 12% in 2017; however, those recommendations appeared to have had more impact in 2018, with a difference in average support between as ISS favorable versus unfavorable recommendation at 33% in 2018 compared with only 26% in 2017.

[ ... ]

In “Should Say-on-Pay Votes Be Binding? [2]”, two executives from the Institute for Governance of Private and Public Organizations in Canada explore the unintended consequences of say on pay:

 	The post contends, consistent with the study discussed in the SideBar above, that (based on other studies) shareholder votes tend to be based on stock price performance. According to the post, if a company’s “shares do better than those of its peers, almost any compensation package will be approved. This perverse result tends to increase the pressure on management to focus on short-term stock performance, sometimes through decisions that may negatively affect future performance.” [Emphasis added.]
 	Why look to stock price performance? The authors attribute this result in part to the current complexity and sheer length of compensation disclosure, presumably one consequence of disclosure designed for say-on-pay proposals. And given that many investors hold shares in numerous companies, it may be easier for them to base their votes on stock performance rather than try to analyze complex compensation packages as detailed in lengthy proxy statement disclosures. (Of course, maybe they don’t even open their proxy envelopes!)  According to the post, “for the 50 largest (by market cap) companies on the Toronto Stock Exchange in 2015 that were also listed back in 2000, the median number of pages needed to describe their executives’ compensation rose from six in 2000 to 34 in 2015, with some compensation descriptions consuming as many as 66.”
 	Instead of checking stock prices, it’s even easier for investors to rely on the recommendations of proxy advisory firms, such as ISS and Glass Lewis (which also take into account relative stock price performance in formulating their vote recommendations). As a result, the influence of proxy advisory firms has increased substantially. According to the post, 83% of directors very much or somewhat agree that their influence has increased.
 	One consequence of the increase in influence of proxy advisory firms has been a certain similarity in executive compensation packages. The post indicates that, to win the recommendation of these firms, boards, comp committees and consultants find it “wiser and safer to toe the line and put forth pay packages that will pass muster…. The result has been a remarkable standardization of compensation, a sort of ‘copy and paste’ approach across publicly listed companies. Thus, most CEO pay packages are linked to the same metrics, whether the companies operate in manufacturing, retailing, banking, mining, energy, pharmaceuticals, or services. For the companies on the S&#38;P/TSX 60 index, the so-called long term compensation for their CEOs in 2015 was based on total shareholder return (TSR) or the earnings per share (EPS) growth in 85 percent of cases. The proxy advisory firm ISS has been promoting these measures as the best way to connect compensation to performance.”

&#160;

Read more [3]

[1] https://www.towerswatson.com/-/media/Pdf/Insights/Newsletters/Global/executive-pay-matters/2018/05/say-on-pay-update-may-15-2018-wtw.pdf?la=de-DE&#38;hash=9BBC90016D9789CC705960FA5062E7AC223E78D7
[2] http://clsbluesky.law.columbia.edu/2016/09/13/should-say-on-pay-votes-be-binding/
[3] https://cooleypubco.com/2018/05/18/2018-say-on-pay-snapshot/]]></content>
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		</item>
		<item>
		<title>Executive pay: time for change ?</title>
		<link>https://igopp.org/en/executive-pay-time-for-change/</link>
		<comments>https://igopp.org/en/executive-pay-time-for-change/#respond</comments>
		<pubDate>Thu, 05 Apr 2018 13:38:01 +0000</pubDate>
		<dc:creator><![CDATA[IGOPP Site web]]></dc:creator>
				<category><![CDATA[News Articles]]></category>
		<category><![CDATA[Executive compensation]]></category>
		<category><![CDATA[Proxy Advisors]]></category>
		<category><![CDATA[Say on Pay]]></category>

		<guid isPermaLink="false">https://igopp.org/?p=9643/</guid>
		<description><![CDATA[A highly standardized process leads to yearly executive pay packages which combine salary, bonuses, stock options, restricted stock grants, performance share units, retirement benefits. The full assemblage will also include formal contracts covering change-of-control situations, termination conditions, etc.  Only the quanta of the compensation package vary from firm to firm. Whenever “long-term” performance objectives are [&#8230;]]]></description>
		<content><![CDATA[A highly standardized process leads to yearly executive pay packages which combine salary, bonuses, stock options, restricted stock grants, performance share units, retirement benefits. The full assemblage will also include formal contracts covering change-of-control situations, termination conditions, etc.  Only the quanta of the compensation package vary from firm to firm. Whenever “long-term” performance objectives are set to earn the variable compensation, “total shareholder return” (TSR) is the metric of choice (for 70% of TSX 60 companies in 2015).

It now takes some 34 pages on average to explain executive compensation. In 2000, it took all of 6 pages to describe executive compensation!

How much is our CEO worth? Well, let’s see what other CEOs of “comparable” companies are paid. Reasonable approach? Actually, no. Assembling a large number of companies from different industries, some US, some Canadian, and setting a particular CEO’s compensation at the median or the 75th percentile of these “comparable” companies’ CEOs is a recipe for ever-rising compensation. The unstated assumption, a dubious one, is that any of these “comparable” companies would recruit the CEO if he/she were not paid adequately.

Then this “competitively” set compensation is largely “at risk” so as to motivate the achievement of high performances. Right. Not really. Performance measures are set by management (or largely influenced by them) and include a broad interval giving access, commonly, to 75% to 150% of the bonus or performance shares (never or rarely 0%). Furthermore, shares have now largely replaced stock options. These shares have value even if the stock price goes down (which is not the case for stock options). Stock prices depend on many uncontrollable factors, which mean luck, good or bad, will play a significant role; actually, good luck pushes up the value of the package; bad luck pushes stock price down but the practice of yearly grant of stock options and shares will average out the effect of “bad luck”.

The compensation package, thus set, does not really please investors but they do not know what else could be done. Proxy advisory agencies, actually the fomenters of this standardized approach, will be favorable to the compensation levels if set according to their diktats. Say-on-pay voting will overwhelmingly support the pay package and the manner of its setting. (In 2016, only four companies of the TSX 60 received 20% or more of negative votes)

The ritualized process described here is indeed reassuring by virtue of the large number of firms abiding by it, but it fails to take into account the very particular character of each corporation, the specific nature of its industry, the time horizon of its strategy implementation, the drivers of its value-creation. It is prudent for a board to comply with the approach described above; any deviation risks incurring disfavor with proxy advisors, an influential lot in this matter.

Boards of directors of large publicly listed corporations are keenly aware of the limitations of the current standardized methods of setting executive pay. But it is very difficult and hazardous for any particular board to deviate from the standard approach. Board chairs of the TSX 60 companies should get together and agree on a different way of setting compensation. A common approach adopted by a large number of TSX 60 companies would be very effective in standing up to proxy advisors and moving forward on this seemingly intractable issue. Otherwise, this festering compensation sore will continue to erode their legitimacy and credibility with investors and the general population.

From an IGOPP policy paper Executive Compensation: Cutting the Gordian Knot published in November 2017. Available at www.igopp.org [1].

[1] https://igopp.org/en/executive-compensation-cutting-the-gordian-knot/]]></content>
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		<item>
		<title>&#8216;Fat cats&#8217; in Peters&#8217; sights</title>
		<link>https://igopp.org/en/fat-cats-in-peters-sights/</link>
		<comments>https://igopp.org/en/fat-cats-in-peters-sights/#respond</comments>
		<pubDate>Wed, 27 Sep 2017 13:30:09 +0000</pubDate>
		<dc:creator><![CDATA[IGOPP Site web]]></dc:creator>
				<category><![CDATA[IGOPP in the Medias]]></category>
		<category><![CDATA[IGOPP in the medias]]></category>
		<category><![CDATA[Executive compensation]]></category>
		<category><![CDATA[Say on Pay]]></category>
		<category><![CDATA[Shareholders]]></category>

		<guid isPermaLink="false">https://igopp.org/fat-cats-in-peters-sights/</guid>
		<description><![CDATA[Winston Peters&#8217; swingeing attack on Fonterra boss Theo Spierings&#8217; $8.3 million pay packet could be the first real salvo in his self-advertised campaign to &#8216;clean up corporate New Zealand&#8217;. There was little attention given to Peters&#8217; campaign against alleged business &#8220;fat cats&#8221; while he was slugging it out on the election trail. But given the [&#8230;]]]></description>
		<content><![CDATA[Winston Peters' swingeing attack on Fonterra boss Theo Spierings' $8.3 million pay packet could be the first real salvo in his self-advertised campaign to 'clean up corporate New Zealand'.

There was little attention given to Peters' campaign against alleged business "fat cats" while he was slugging it out on the election trail. But given the Spierings' attack, it would be foolish to assume that the issue will disappear from his agenda once the next Government has been formed.

[ ... ]

What Peters is promoting is "say on pay" policies which would enable shareholders (including the cooperative members of Fonterra and other agri-coops) to veto pay increases for chief executives as well as directors. He has proposed an amendment to the Companies Act to give effect to this policy.

[ ... ]
In a December 2016 paper on the Columbia Law School Blue Sky Blog, Yvan Allaire (executive chair of the Institute for Governance of Private and Public Organisations), and Francois Dauphin, (IGOPP's director of research) examined whether other countries should follow the UK.
They pointed out that a binding vote on executive compensation raised many technical issues: "Given the complexity of current compensation programs, what are shareholders voting on, and what does a negative vote really mean? In case of a negative vote, will the company carry on with its current policies, which may be worse than the proposed and rejected policies?"
Their view is that pay policies should be the preserve of the board.
"When egregious pay packages are given to executives, a say-on-pay vote, compulsory or not, binding or not, will always be much less effective than a majority of votes against the election of members of the compensation committee. But that calls upon large investment funds to show fortitude and cohesiveness in the few instances of unwarranted compensation which occur every year."
Read more [1]

[1] http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&#38;objectid=11926814&#38;utm_medium=email&#38;utm_content=f9YkijJunboOlggU-gwlp0XAefa-bPFjaGSPNxor6fY5phatWDmR-z_8GxLOWaZF]]></content>
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		<item>
		<title>U.K. reforms bring workers&#8217; voices to corporate boards</title>
		<link>https://igopp.org/en/uk-reforms-bring-workers-voices-to-corporate-boards/</link>
		<comments>https://igopp.org/en/uk-reforms-bring-workers-voices-to-corporate-boards/#respond</comments>
		<pubDate>Thu, 31 Aug 2017 14:42:14 +0000</pubDate>
		<dc:creator><![CDATA[IGOPP Site web]]></dc:creator>
				<category><![CDATA[IGOPP in the Medias]]></category>
		<category><![CDATA[IGOPP in the medias]]></category>
		<category><![CDATA[Executive compensation]]></category>
		<category><![CDATA[Regulation]]></category>
		<category><![CDATA[Say on Pay]]></category>
		<category><![CDATA[Stakeholders]]></category>

		<guid isPermaLink="false">https://igopp.org/?p=8825/</guid>
		<description><![CDATA[The United Kingdom is stiffening the rules large companies must follow in an effort to rein in executive pay and bolster the input of ordinary employees in the running of their firms. On Tuesday, the government outlined a series of changes. Large publicly-traded companies will have to report annually the ratio of CEO pay to [&#8230;]]]></description>
		<content><![CDATA[The United Kingdom is stiffening the rules large companies must follow in an effort to rein in executive pay and bolster the input of ordinary employees in the running of their firms.

On Tuesday, the government outlined a series of changes. Large publicly-traded companies will have to report annually the ratio of CEO pay to the average pay of their U.K. workforce.

The rules around an existing requirement for shareholders to vote on executive pay will also be tightened.
Canadian regulators watching

U.K. corporate governance rules are already more stringent than those in Canada. And observers here say the changes will put additional pressure on Canadian firms to open executive compensation to more scrutiny.

"This is the way the world is going," said Richard Leblanc, associate professor of governance, law and ethics at York University. "Canadian regulators will absolutely take note of this, and Canadian companies will need to too."

As well, the U.K. rule changes demand that corporate boards give greater voice to employees at the boardroom table. It's something that recently became an issue in Canada, when Sears Canada laid off employees without severance, while executives of the insolvent company were offered retention bonuses.

[ ... ]

Say-on-pay votes

Since then, so-called say-on-pay votes have become mandatory in jurisdictions including the U.K., the U.S. and Australia. In Canada, the Institute for Governance of Private and Public Organizations reports that 80 per cent of the largest companies have voluntarily adopted the practice, subjecting executive pay to an annual shareholder vote. But those results are not binding. Dr. Leblanc said that if Canada is to strengthen rules, this would be a logical place to start.

Read more [1]

[1] http://www.cbc.ca/news/business/executive-pay-uk-corporate-governance-employee-workers-pay-disparity-1.4269063?_scpsug=crawled_48570_4b99cb20-8e44-11e7-f73a-f01fafd7b417#_scpsug=crawled_48570_4b99cb20-8e44-11e7-f73a-f01fafd7b417]]></content>
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		<title>The CEO pay crusade</title>
		<link>https://igopp.org/en/the-ceo-pay-crusade/</link>
		<comments>https://igopp.org/en/the-ceo-pay-crusade/#respond</comments>
		<pubDate>Thu, 29 Jun 2017 19:40:57 +0000</pubDate>
		<dc:creator><![CDATA[IGOPP Site web]]></dc:creator>
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		<guid isPermaLink="false">https://igopp.org/?p=8342/</guid>
		<description><![CDATA[For a few months there, 2016’s political earthquakes seemed to signal a power shift away from the 1%. What started with the Brexit vote escalated when Donald Trump won the White House. Now, as we barrel toward an apocalypse incited by ill-advised presidential tweets, all that anti-elite anger has somehow been forgotten—and with it, any [&#8230;]]]></description>
		<content><![CDATA[For a few months there, 2016’s political earthquakes seemed to signal a power shift away from the 1%. What started with the Brexit vote escalated when Donald Trump won the White House. Now, as we barrel toward an apocalypse incited by ill-advised presidential tweets, all that anti-elite anger has somehow been forgotten—and with it, any hope of a crackdown on runaway CEO pay.
Need proof this is an outrage that must be reined in? In an era of ruthless corporate cost-cutting and job losses, CEO pay on both sides of the Canada-U.S. border is astronomical. According to the Canadian Centre for Policy Alternatives, the top 100 highest-paid CEOs in Canada made, on average, $9.5 million a year in 2015. That’s 193 times the average industrial worker’s wage and a 30% increase from 2008, the start of the global financial crisis.
Take H&#38;R REIT: CEO Tom Hofstedter won the corporate governance lottery last year when his board blessed him and fellow executives with a batch of exceptionally lucrative stock options (on top of the $78-million worth of stock he already owned). Normally, options are granted at idealistic future prices, as a reward to executives for boosting the company’s equity value. But H&#38;R’s board issued Hofstedter’s practically at-the-money, which meant he could use them to buy shares almost right after he got them. And the timing happened to fall in late February, 2016—the same month H&#38;R’s stock fell to its lowest level in over five years.
[ ... ]
Until institutional shareholders get comfortable with calling out boards and CEOs (and let’s hope they do, soon), a few structural fixes could do wonders. For starters, make say-on-pay votes binding. As of early this year, according to the Montreal-based Institute for Governance of Private and Public Organizations, 80% of large Canadian companies have embraced say-on-pay. But such votes are meaningless if boards aren’t required to act on the results—and they often don’t. (A notable exception: Barrick Gold reformed its compensation after failing say-on-pay votes twice in three years.)
Read more [1]

[1] https://www.theglobeandmail.com/report-on-business/rob-magazine/its-time-to-overhaul-the-way-we-compensateceos/article35475579/]]></content>
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		<title>The generally accepted compensation principles (GACP) in good times and in bad times</title>
		<link>https://igopp.org/en/la-remuneration-des-dirigeants-quand-ca-va-bien-quand-ca-va-mal/</link>
		<comments>https://igopp.org/en/la-remuneration-des-dirigeants-quand-ca-va-bien-quand-ca-va-mal/#respond</comments>
		<pubDate>Thu, 27 Apr 2017 15:00:57 +0000</pubDate>
		<dc:creator><![CDATA[IGOPP Site web]]></dc:creator>
				<category><![CDATA[News Articles]]></category>
		<category><![CDATA[Publications ]]></category>
		<category><![CDATA[Chairman of the Board]]></category>
		<category><![CDATA[Executive compensation]]></category>
		<category><![CDATA[Say on Pay]]></category>
		<category><![CDATA[Value-creating governance]]></category>

		<guid isPermaLink="false">https://igopp.org/la-remuneration-des-dirigeants-quand-ca-va-bien-quand-ca-va-mal/</guid>
		<description><![CDATA[The debacles of Enron, Worldcom and others in 2001-2002 were imputed in good part to the “flexibility” of accounting norms and the artistry in their interpretation. As a result, regulators, governmental and professional, greatly tightened the Generally Accepted Accounting Principles (GAAP) to which all publicly traded companies must rigorously adhere. Any breach of the GAAP [&#8230;]]]></description>
		<content><![CDATA[The debacles of Enron, Worldcom and others in 2001-2002 were imputed in good part to the “flexibility” of accounting norms and the artistry in their interpretation. As a result, regulators, governmental and professional, greatly tightened the Generally Accepted Accounting Principles (GAAP) to which all publicly traded companies must rigorously adhere.

Any breach of the GAAP carries severe penalties ranging from re-statement of financial accounts to jail terms.

Curiously, under the unrelenting pressure of regulators, institutional investors and, particularly, of proxy voting advisory firms (such as ISS and Glass, Lewis), the setting of executive compensation is now governed by generally accepted compensation principles (GACP).

As deviations from these principles do carry significant risks for board members, GACP are meticulously observed and almost universally adopted. Indeed, the strict application of GACP ensures that the say-on-pay vote will be overwhelmingly supportive and board member re-election a foregone conclusion, unless other issues crop up.

These GACP call for specific processes and rules to set executive compensation, among which the following are critical:

 	a significant proportion of the compensation of senior officers should be "risk-based", i.e., it should be linked directly to the share price; this means that a large part of the compensation package takes the form of stock options, shares or units the value of which is linked to the share price;
 	a large portion of this incentive compensation must be “earned” by achieving some targeted financial measures;
 	this package of salary, bonus, stock options and share-related incentives is granted in different quanta every year;
 	the aggregate CEO compensation must be set with reference to the CEO compensation of so-called "comparable" companies; this bench-marking group of companies is selected by the company under advisement of its compensation consultants; this process is intended to provide guidance as to the "market" value of the CEO who, if underpaid, could presumably move to another company.

These compensation practices are based on questionable assumptions and weak premises but they have become the norm. Having applied GACP strictly, faithfully, the corporation will not face much push-back or criticism for the compensation of its executives, at least not from the institutional shareholders, provided its share price has performed reasonably well, preferably better than a relevant index.

Obviously, if the firm's financial performance is mediocre, the shareholders will be able to show their displeasure by exercising their (advisory) say-on-pay voting rights, or by voting against the election of certain members of the board.

But if the company is in difficulty and must turn-around its operations, how should its management be compensated in such circumstances? Surely, the usual GACP, whatever their limits and flaws in good times, cease to apply in turnaround circumstances.

Compensation for executives in a turn-around 

A company facing a turnaround situation will usually recruit several outside executives with the talent set for the job. How do you persuade senior managers to leave a position with a stable firm and take on the risks of a turnaround job with its unrelenting work under stressful conditions?

Should the newly recruited executives be less well-paid than executives in normal course companies, especially when they are not responsible for the firm's current difficulties? Of course not, but the form of their compensation should be adjusted to these circumstances.

What compensation program should the board of directors adopt in such a situation?

 	As cash and cash flows are critical in a turnaround, the compensation of the senior executives should involve a minimum of cash disbursements; so, no annual bonuses and no salary increases;
 	On the other hand, when the new executives are hired, they should be granted stock options in sufficient quantity to attract and motivate these executives; while we are opposed, in principle, to the granting of stock options, this form of compensation is inevitable in a turnaround situation; these options should only be exercisable after three years of employment with the firm; if the new management team succeeds in the turnaround operation, it will be highly compensated for their work.
 	However, the practice of adding new stock options every year to the executives' compensation should be dropped (as it should for companies not in a turnaround situation).
 	The board or its spokesperson should clearly explain that such stock options do not make use of the company’s cash and that the monetary value attributed to this form of compensation is entirely hypothetical, based on a questionable mathematical formula. If the new executives are unsuccessful in turning the firm around, the value of these options could be zero!
 	In a turnaround context, the senior executives should not receive any units linked to the share price other than stock options.

&#160;

Thus, for a turnaround, a situation which may well have social and political repercussions, the board of directors must design unique, ad hoc, compensation programs that are sensitive to these realities and defend these programs forcefully.

A board spokesperson, its chair, or the lead director, if the chair is conflicted, must explain the board's decisions in the media. Contrary to the practice in the United Kingdom where the chair of the board becomes the corporation's main spokesperson for all matters relating to governance, boards of directors in North America keep a low profile and stay away from the media spotlight when governance issues come up for public scrutiny. That is a mistake.

&#160;

The author is solely responsible for the opinions expressed in this article.
]]></content>
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		<title>The Canadian Say on &#8221;Say on Pay&#8221;</title>
		<link>https://igopp.org/en/the-canadian-say-on-say-on-pay/</link>
		<comments>https://igopp.org/en/the-canadian-say-on-say-on-pay/#respond</comments>
		<pubDate>Mon, 06 Feb 2017 16:00:01 +0000</pubDate>
		<dc:creator><![CDATA[mlamnini]]></dc:creator>
				<category><![CDATA[IGOPP in the Medias]]></category>
		<category><![CDATA[IGOPP in the medias]]></category>
		<category><![CDATA[Executive compensation]]></category>
		<category><![CDATA[Say on Pay]]></category>

		<guid isPermaLink="false">https://igopp.org/?p=7234</guid>
		<description><![CDATA[As the New Year rolls along, so does commentary on executive compensation. According to the Canadian Centre for Policy Alternatives, by 11:47 am on the first working day of 2017 (January 3rd) Canada’s 100 highest paid CEOs on the TSX index had earned the equivalent of the average annual Canadian wage. Shareholder votes on the [&#8230;]]]></description>
		<content><![CDATA[As the New Year rolls along, so does commentary on executive compensation. According to the Canadian Centre for Policy Alternatives, by 11:47 am on the first working day of 2017 (January 3rd) Canada’s 100 highest paid CEOs on the TSX index had earned the equivalent of the average annual Canadian wage.

Shareholder votes on the executive compensation disclosed in management proxy circulars (“say on pay”) are not mandated in Canada. However, according to the Institute for Governance of Private and Public Organizations, 80% of the largest Canadian companies have adopted the practice voluntarily or as a result of pressure from investors.

Say on pay initiatives have been well under way in many jurisdictions for a number of years and the reviews are in.

Read more [1]

[1] http://www.lexology.com/library/detail.aspx?g=03280eef-8056-4a2b-8fa1-27c2ee6d4169&#38;utm_medium=email&#38;utm_content=Ly-3_D57eve3hWkapTbgiw]]></content>
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		<title>Making Say-on-Pay Vote Binding: A Good Idea?</title>
		<link>https://igopp.org/en/say-on-pay-binding-good-idea-2/</link>
		<comments>https://igopp.org/en/say-on-pay-binding-good-idea-2/#respond</comments>
		<pubDate>Tue, 13 Sep 2016 15:04:06 +0000</pubDate>
		<dc:creator><![CDATA[mlamnini]]></dc:creator>
				<category><![CDATA[News Articles]]></category>
		<category><![CDATA[Columbia Law School Blog]]></category>
		<category><![CDATA[Proxy Advisors]]></category>
		<category><![CDATA[Say on Pay]]></category>
		<category><![CDATA[Shareholders]]></category>

		<guid isPermaLink="false">https://igopp.org/?p=6470</guid>
		<description><![CDATA[The practice of a non-binding say-on-pay vote by shareholders spread quickly and broadly. It seemed that, finally, shareholders would be given the opportunity to express their dissatisfaction with outrageous or ill-conceived compensation packages. The practice, at first, was voluntary with companies agreeing to submit their compensation policies to a vote. Then, as the number of [&#8230;]]]></description>
		<content><![CDATA[The practice of a non-binding say-on-pay vote by shareholders spread quickly and broadly. It seemed that, finally, shareholders would be given the opportunity to express their dissatisfaction with outrageous or ill-conceived compensation packages.

The practice, at first, was voluntary with companies agreeing to submit their compensation policies to a vote. Then, as the number of volunteers remained small, investors submitted proposals whereby shareholders were to vote for or against the company having to carry out a non-binding vote on pay.

In some jurisdictions (the U.S. for instance), non-binding say-on-pay votes were made mandatory. In Canada, say-on-pay vote is not mandated but 80% of the largest companies have adopted the practice voluntarily or as a result of pressures by investors.

Now that say-on-pay has been around for a few years, what does research tell us about its effectiveness? Academic studies provide a mixed view at best. It would appear that say-on-pay has led to more dialogue between the company and large shareholders but did not stop the rise in executive compensation.

Some findings are disturbing as they point to unintended consequences. For instance, studies tend to show that shareholders vote according to the company’s recent share return rather than relying on an analysis of its specific compensation policies and practices. If the company’s stock performs well compared to its peers, almost any compensation package will be approved. This perverse result tends to increase the pressure on management to focus on short-term stock performance, sometimes through decisions that may impact negatively future performance.

But this result is not surprising. The challenge of reading and understanding the particulars of executive compensation has become far more daunting. Indeed, for the 50 largest (by market cap) companies on the TSX in 2015 that were also listed back in 2000, the median number of pages to describe their compensation went from 6 in 2000 to 34 pages in 2015, ranging all the way up to 66 pages. Investors with holdings in dozens or hundreds of stocks face a formidable task. The simplest way out is either to vote per the stock’s performance or, more likely, rely on the recommendation of proxy advisory firms (which also base their “advice” on relative stock market performance)

Thus, 66% of corporate directors do not agree that say-on-pay resulted in a “right-sizing” of CEO compensation; yet 83% of these directors very much agree or somewhat agree that say-on-pay increased the influence of proxy advisors. (Source: PwC and Cleary Gottlieb 2016, Boards, shareholders, and executive pay)

Boards of directors, compensation committees and their consultants have come to realize that it is wiser and safer to toe the line and put forth pay packages that will pass muster with proxy advisory firms. The result has been a remarkable standardization of compensation, a sort of “copy and paste” across publicly listed companies.

Thus, most CEO pay packages are linked to the same metrics, whether they operate in manufacturing, retailing, banking, mining, energy, pharmaceuticals or services. For the companies on the S&#38;P/TSX 60 index, the so-called long term compensation for their CEO in 2015 was based on total shareholder return (TSR) or the earnings per share growth (EPS) in 85% of cases. The proxy advisory firm ISS has been promoting these measures as the best way to connect compensation to performance.

In spite of, or perhaps because of, the limited usefulness of non-binding say-on-pay votes, various parties are promoting a binding shareholder vote on pay. That is, rejection by shareholders of pay packages or policies would force the board to change them and re-submit the package or policy to a shareholder vote. Promoters of this measure are a bit hazy on the details and particulars. But the notion is alluring to many investors and government policy makers.

Indeed, the UK has already adopted a form of binding say-on-pay and France has recently enacted a compulsory and binding say-on-pay for French listed companies. Shareholders of UK companies, every three years, will hold a binding vote on the remuneration policy of the company. Rejection of said policies would force the company to continue to operate according to the previous remuneration policy, or to call a general meeting and present a new remuneration policy to shareholders for approval.

UK shareholders will also vote yearly and in a non-binding way to approve the total pay (single figure) awarded to company executives.

The French government is seeking to adopt a system of shareholder votes similar to that of the UK. The enabling act is now stalled by the French senate but some version akin to the UK’s should emerge soon.

Conclusion

Should Canada go the way of the UK and France? A binding vote on executive compensation raises many technical issues: given the manifold complexity of compensation programs nowadays, what are shareholders voting on, what does a negative vote really mean? In case of a negative vote, will the company carry on with its current policies, which may be worse than the proposed and rejected policies?

At a more fundamental level, the setting of pay policies should be the preserve of the board, as Canadian corporate law clearly states. When egregious pay packages are given to executives, a say-on-pay vote, compulsory or not, binding or not, will always be much less effective than a majority of votes against the election of members of the compensation committee. But that calls upon large investment funds to show fortitude and cohesiveness in the few instances of unwarranted compensation which occur every year.

That is as it should be, notwithstanding the indirect benefits claimed for the practice of say-on-pay.
]]></content>
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