John Tuzyk and Julia Tomson


  • 7% of Canadian-listed companies have adopted Say-on-Pay votes
  • OSC considering mandatory advisory Say-on-Pay votes

One of the developments to be observed in the upcoming proxy season will be the extent to which any additional public companies adopt a Say-on‑Pay shareholder vote – a shareholder vote approving executive compensation decisions – either voluntarily or in response to shareholder proposals for consideration at upcoming shareholders’ meetings.

The implementation of shareholder Say-on-Pay votes on the compensation practices of public companies in Canada started in 2009, when the major Canadian banks announced that they would give shareholders an advisory Say-on-Pay vote in 2010.

Our survey reveals that, to date, 71 reporting issuers in Canada, including the major banks, have adopted Say-on-Pay advisory votes, and 10 more will hold their first votes either later in 2011 or in 2012, representing in total approximately 7% of Canadian listed issuers by number (excluding structured-product issuers and non-listed issuers). Thirty-nine of these 81 issuers adopted, or announced they will adopt, a vote since December 2010. The Canadian Coalition for Good Governance (CCGG), an organization representing institutional shareholders and asset managers, which advocates the adoption of Say-on-Pay votes by Canadian companies, published a June 2011 Study indicating that 44 of the companies in the S&P/TSX Composite Index, representing 19% of the companies in that Index, have adopted Say-on-Pay votes.

Some companies, however, have indicated that they do not intend to implement a Say-on-Pay vote and, in a number of cases, shareholders have rejected shareholder proposals for an advisory Say-on-Pay vote at their companies.

In another significant development relating to Say‑on‑Pay for Canadian public companies, the Ontario Securities Commission (the OSC) issued OSC Staff Notice 54-701 – Regulatory Developments Regarding Shareholder Democracy Issues (OSC Notice 54-701) earlier this year, which identified the Say-on-Pay vote as an issue requiring additional review and potential development of regulatory proposals, and requested comments on this topic.

Although Say-on-Pay votes in Canada have to date been adopted in the form of a non-binding advisory vote, whereby shareholders approve on a non-binding basis the approach to executive compensation disclosed in the management proxy circular for the prior fiscal year, there are other forms which such a vote can take, and Say-on-Pay voting has been implemented in different forms in various countries.

Legislation in the United Kingdom requires an annual non-binding advisory vote by shareholders upon a remuneration report that includes pay policy for the following year and the compensation practices from the prior year. Australia has also adopted an advisory, non-binding Say-on-Pay vote on remuneration reports. However, if a remuneration report receives a 25% negative vote at two successive annual shareholders’ meetings, at the second meeting, the shareholders are to vote on holding a general meeting within 90 days to vote on retaining the existing directors.

Some countries have advisory non-binding votes that are not prescribed by legislation, resembling the current Canadian framework. For instance, in Ireland, some companies have held Say-on-Pay votes.
Other countries, such as the Netherlands, require a binding vote, whereby shareholders approve the compensation policies or guidelines of the company and changes to them. The Scandinavian countries – Denmark, Sweden and Norway – also require a mandatory binding Say-on-Pay, in somewhat different forms. South Africa also requires a binding Say-on-Pay vote, requiring directors’ remuneration to be approved in advance at each annual general meeting.

The European Commission has presented for public consultation proposed reforms that are intended to improve the corporate governance of listed companies, including a proposal for all European listed companies to be required to provide shareholders with a vote on remuneration policy and the remuneration report.

On January 25, 2011, the U.S. Securities and Exchange Commission (the SEC) issued rules under the Dodd‑Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) pursuant to which public companies are required to conduct three different types of shareholder votes:

an advisory vote on the company’s executive compensation at least once every three years (equivalent of Say-on-Pay);

an advisory vote at least once every six years to determine the frequency of Say-on-Pay votes: once every one, two or three years (say on frequency); and

an advisory vote on certain golden parachute arrangements for meetings at which shareholders are to approve a merger or similar transaction (say on golden parachutes).

U.S. public companies generally are required to hold “Say-on-Pay” and “say on frequency” votes for all annual meetings of shareholders occurring on or after January 21, 2011, with smaller reporting companies being required to start doing so on or after January 21, 2013.

Although the Dodd-Frank Act did not prescribe language for the form of resolution, the SEC provides the following example:

  • “Resolved, that the compensation paid to the company’s named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion, is hereby approved.”

    Interestingly, shareholders in the U.S. have filed at least six lawsuits against boards of directors who approved executive compensation which subsequently received a majority negative Say-on-Pay vote.

    Say-on-Pay is not currently required by any Canadian legislation, but, as noted above, has been adopted as an advisory vote by a number of Canada’s largest corporations, either voluntarily or in response to non‑binding votes on shareholder proposals. Although Say-on-Pay votes in Canada are not binding as to compensation decisions, boards of companies which have adopted Say-on-Pay votes have indicated the results of votes will be taken into account by them in making such decisions.

    Institutional Shareholders and Market Practices
    CCGG recommends that all boards adopt an advisory Say-on-Pay vote as a best practice. In 2009, the CCGG, along with a small group of Canadian companies, drafted a model policy and a form of Say-on-Pay advisory resolution to submit for a shareholders vote on an advisory basis, which resolution provides that shareholders accept the approach to executive compensation disclosed in the company’s information circular delivered in advance of the relevant annual meeting of shareholders, without diminishing the role and responsibilities of the board of directors. Because of the existence of this model policy and recommended resolution, there has been little variation amongst Canadian issuers who have adopted a Say-on-Pay vote as to the form of resolution.

    CCGG has indicated that it will monitor the results of advisory Say-on-Pay votes to determine whether issuers are responding appropriately to the results of these votes, and its agenda for 2011 and 2012 includes extending Say-on-Pay across a broader group of Canadian companies.

    As shareholders of a number of Canadian reporting issuers, SHARE and Meritas have played an active role in promoting the adoption of Say‑on-Pay votes. Since 2008, Meritas has put forward a number of shareholder proposals to Canadian public companies pertaining to Say-on-Pay.

    For companies which have held Say-on-Pay votes, the approval rate is extremely high. Results of the 2010 Say-on-Pay vote ranged in their approval between 86% and 99% with a 95% average approval rate, with 23 issuers having a 90%+ acceptance rate. So far, results of the 2011 Say-on-Pay vote ranged in their approval between 54% and 99%, with a 93% average approval rate, with 45 issuers having a 90%+ approval rate.

    OSC Notice 54-701 on Shareholder Democracy
    As noted above, the OSC issued OSC Notice 54‑701 which identified an advisory Say-on‑Pay vote as one of the “shareholder democracy” issues requiring additional review and potential development of regulatory proposals, and requested comments as to whether staff should develop a proposal in this area.

    The implementation of this reform would make Ontario the first province in Canada that would require shareholders to have a Say-on-Pay vote. It is noteworthy that the initiative was taken solely by the OSC, and not by all of the Canadian Securities Administrators (CSA). However, the OSC has indicated that it intends to co‑ordinate its review and development of any regulatory proposals with other CSA members.

    Imposing substantive governance rules goes beyond the usual historical role of securities commissions, which has been to prescribe disclosure and related obligations for issuers.

    Comments on OSC Notice 54-701
    Over 60 submissions were received by the OSC in response to OSC Notice 54-701. These indicated there was little consensus on adopting Say-on-Pay at Canadian public companies.

    Predictably, most institutional shareholders and their organizations are in favour of a mandatory advisory Say-on-Pay vote. For instance, CCGG urged the OSC to make annual advisory Say-on-Pay votes mandatory for all Canadian issuers. In addition to CCGG, the proxy advisory firm ISS, whose business is the review of proxy circulars for institutional shareholders and making voting recommendations to them, believes that advisory votes on executive compensation improve disclosure and corporate governance and support “increased investor responsibility”.

    On the other hand, the Institute of Corporate Directors (ICD), and most issuers which commented, indicated opposition to a mandatory Say-on-Pay vote, even with the results being advisory. ICD indicated that it did not believe in the “one size fits all” approach and urged the exercise of caution before promoting universal standards or prescriptive rules. ICD also indicated it did not “support practices which effectively undermine or diminish the board of directors’ responsibility on compensation matters”.

    One institutional shareholder which does not support shareholder proposals for Say-on-Pay is the Ontario Teachers’ Pension Plan, which has stated that “it is not the responsibility of shareholders to advise the board on compensation decisions”. It believes that compensation issues are better addressed with “the ability to remove underperforming directors with [its] shareholder vote”.

    The principle underlying Say-on-Pay is shareholders having the opportunity to express their views on compensation decisions and policies of issuers – a “say on pay”. ISS has identified Say-on-Pay as the primary communication tool for shareholders expressing dissatisfaction with compensation practices. CCGG views Say-on-Pay as an important part of an ongoing, integrated engagement process between shareholders and boards and believes that Say-on-Pay has contributed to significant improvement in the clarity of Compensation Discussion & Analysis disclosure under securities laws.

    Corporations that provide their shareholders with advisory vote on executive compensation are rewarded by corporate governance rating organizations. For instance, for 2010, the Globe and Mail’s Board Games have awarded such companies points for the adoption of a Say-on-Pay vote.

    Those who question the appropriateness of the Say‑on‑Pay concept note that, under corporate law, directors have the legal duty to supervise management of the corporation, and compensation is an important part of that role.

    They also note that, as a legal matter, unlike directors, who are legally required to act with a view to the best interests of the company, and with due care and skill, shareholders are generally free to act completely in their own self-interest, without duties of care or skill to other shareholders. Accordingly, in terms of their legal relationship to the company and other shareholders, a shareholder may vote in respect of a Say-on-Pay vote in any manner, for any reason, it wishes. Shareholders have various levels of sophistication and interest and their investment time horizons may vary. As such, some have questioned whether shareholders should vote on issues, including Say-on-Pay, that are the responsibility of the board of directors. Directors have the required expertise, advice on complex tax and regulatory issues, and company specific knowledge that allow them to tailor the executive compensation approach to an individual company.

    As well, it has been noted that there may not be compelling logic to have shareholders vote on compensation decisions, and not have similar involvement in other corporate decisions made by the board, such as capital expenditures or acquisitions, which may be more material.

    Others have pointed out that a Say-on-Pay resolution is a “say” on the entire executive compensation program and package, not individual components of that package. As such, the reasons for a significant negative vote may not be clear, and may not communicate any clear or comprehensive, actionable meaning to directors. As well, even a significant negative vote, if less than a majority, may imply endorsement of the decisions of the issuer’s board by a majority of shareholders, putting boards in an unenviable position as to how to respond to a negative vote by some, but not a majority of, shareholders.

    In addition, concerns have been expressed regarding the extent of influence on the vote of the proxy advisory firms such as ISS, and their possible lack of time, expertise and full understanding of executive compensation of each company, particularly in light of the large number of proxy circulars they review.

    Also, the imposition of Say-on-Pay on controlled companies, of which there are a significant number in Canada, may provide illusory comfort to shareholders, given that the results of such vote will turn on the views of the controlling shareholder. It might in fact lead to the controlling shareholder exerting a greater influence on executive compensation to the detriment of other shareholders, beyond the influence currently indirectly effected through the election of directors.

    A number of commentators have noted that Canada has not experienced the same problematic pay practices, nor a bailout of its financial institutions, as was the case in other jurisdictions, and accordingly there is no significant problem for the proposed solution of Say‑on‑Pay advisory votes to solve.

    As well, although perhaps less likely in Canada given the practices and requirements relating to class action claims, some may have a concern that negative shareholder votes may give rise to shareholder class actions against directors as has occurred in the U.S.

    Issuers who have not to date adopted Say-on-Pay votes may wish to defer any decisions on introducing a Say‑on-Pay vote at their company until the results of the OSC review and consultation arising out of OSC Notice 54 701 are published.

    For further details, or if you have any questions concerning this bulletin, please contact John Tuzyk at 416-863-2918 or john.tuzyk@blakes.com or any member of our Securities Group.
  • Posted by:
    John Tuzyk and Julia Tomson
    Tags: Capital Markets

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