Say-on-Pay Developments in 2012

In recent years, investors and commentators alike have paid serious attention to shareholder rights regarding executive compensation. Part of this movement has been the implementation of "say-on-pay," which is a non-binding, advisory shareholder vote on executive compensation. This bulletin discusses some notable developments regarding say-on-pay during the 2012 proxy season so far.

Say-on-Pay in Canada

Say-on-pay is not mandatory under Canadian law; however, Canadian companies may voluntarily adopt say-on-pay to provide shareholders with an opportunity to express their satisfaction or dissatisfaction with the company’s approach to executive compensation. Owing to the voluntary nature of the vote, early adopters have generally been companies that expect to receive favourable results, whereas many smaller companies or companies with controversial compensation practices have yet to adopt say-on-pay.

Say-on-Pay in the United States

In contrast, say-on-pay has been mandatory for U.S. public issuers since the 2011 proxy season. Canadian issuers and other foreign private issuers are exempt from the U.S. requirement. U.S. issuers must submit say-on-pay proposals for their annual shareholder meetings at least once every three years. These issuers are also mandated to have a shareholder vote at least once every six years about the frequency of say-on-pay votes, specifically to determine whether the say-on-pay vote should be held every year or every two or three years. Issuers must disclose in future proxies whether and how they have taken previous voting results into account when making compensation decisions; however, say-on-pay is still advisory in nature, meaning that voting results are not binding on an issuer’s board of directors.

Momentum in Canada

From a corporate governance perspective, say-on-pay is generally viewed as a best practice. Since 2009 the Canadian Coalition for Good Governance has encouraged companies to adopt say-on-pay as part of the engagement process between a company’s shareholders and its board of directors and has published guidelines and a model say-on-pay policy. According to its Staff Notice 54-701, the Ontario Securities Commission (OSC) has been monitoring international developments regarding say-on-pay as part of its shareholder democracy initiative and is considering whether Canadian securities regulators should introduce mandatory say-on-pay. The comment period for this OSC staff notice closed March 31, 2011, and we are awaiting further OSC commentary on say-on-pay.

Increased numbers of Canadian companies voluntarily adopted say-on-pay for the 2012 proxy season. The Shareholder Association for Research & Education (SHARE) maintains a list of Canadian issuers that have adopted say-on-pay, and to date the number of companies holding these votes in 2012 (or agreeing to hold them in a future year) is 99, which is up from the 71 companies that adopted say-on-pay in 2011.

Given the growing movement in Canada, as well as the mandatory nature of say-on-pay in the United States, it is perhaps not surprising that a significant number of Canadian companies adopted say-on-pay for the first time during the 2012 proxy season. What has been surprising about this proxy season are some high-profile say-on-pay failures in both countries, as discussed below.

Highlights of the 2012 Results

The 2012 proxy season produced the first say-on-pay failure of a Canadian company – pharmaceutical company QLT Inc. garnered only 42% shareholder support for its compensation program. It is interesting to note that QLT shareholders overwhelmingly approved the say-on-pay vote in 2011; nevertheless, many point to the tumultuous context of the recent proxy battle with certain QLT shareholders as an explanation for this year’s result.

Another notable aspect of this year’s Canadian say-on-pay results is the increase in the number of companies that are facing shareholder support below expected thresholds. According to SHARE, 10.6% of this year’s say-on-pay votes received less than 80% support, compared with only 1.6% in 2011. SHARE also found that even though no Canadian companies received less than 70% support in 2011, this number rose to 4.5% in 2012. Canadian Pacific Railway Ltd. is perhaps the best example of this development: its 62% say-on-pay support for this year is down from the 97% received last year.

There were also high-profile say-on-pay failures in the United States during the 2012 proxy season. In particular, the shareholders of Citigroup Inc. rejected the company’s pay plans in April, with only 45% support. In response to the failed vote, Citigroup publicly stated that it would carefully consider the result and is expected to resolve the pay dispute by the end of the year. Analysts believe that a significant reason for the failed vote is the CEO’s $15 million pay package and additional retention plan following a year in which the value of Citigroup’s shares fell approximately 44%. Citigroup is the first financial institution to have a failed say-on-pay vote, despite the perceived dissatisfaction with executive compensation within the industry.

Overall say-on-pay support also decreased in the United States this year. According to a report published by Semler Brossy, an executive compensation consulting firm, approximately 40 companies had failed say-on-pay votes in 2011, and this number rose to approximately 50 companies in 2012 to date. Notably, four companies failed in both years. Semler Brossy also points out that 9% of this year’s say-on-pay votes received less than 70% support, compared with 7% in 2011.

Shareholder Litigation

One concern for companies that hold say-on-pay votes is the possibility of shareholder litigation in response to a failed vote. Such shareholder suits were more prevalent in the United States during 2011, when nearly half of the companies with failed say-on-pay votes were sued. Citigroup’s shareholders filed a lawsuit only two days after the failed vote result discussed above. We note that despite the one failure in Canada, to date there has been no shareholder litigation.


Commentators point out that say-on-pay votes may be difficult to interpret because certain shareholders may base their vote on the entire compensation package, whereas some may base their vote on particular items and others may be voting with overall corporate performance in mind rather than just executive compensation. In any case, say-on-pay can have a significant practical impact on boards of directors. Even though technically these votes are advisory, a "no" vote cannot be ignored because of the increased exposure to shareholder scrutiny. When considering why say-on-pay votes fail, commentators often cite the pay-for-performance disconnect and problematic pay practices as factors influencing dissident shareholders. Other factors include non-performance-based equity, questionable benchmarking practices and poor disclosure. Companies would be wise to engage shareholders and address their concerns in advance of the annual meeting in order to avoid a negative vote.



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