Compensation, activism and director elections dominate Canada's proxy season, says report

Improving communication with shareholders viewed as key to securing higher say on pay support and combating investor activist gains

Executive compensation, shareholder activism and director elections have been the dominant themes during the 2015 Canadian proxy season, according to proxy voting information provider Proxy Insight.

In its latest report, Proxy Insight finds that as of the end of May, 66 Canadian companies had filed 118 management resolutions that received less than 80 percent voting support on average. Eight of those companies had resolutions receiving less than 50 percent support on issues such as compensation, advance notice by-laws and director elections. Shareholder discontent seems to be widespread so Proxy Insight asked prominent names among Canadian proxy advisory firms why certain voting trends have surfaced.

Executive compensation has become a very contentious issue for shareholders and as a result, a number of high profile Canadian companies failed to pass say-on-pay votes this year including Barrick Gold Corp (73.4 percent against) and Canadian Imperial Bank of Commerce (56.8 percent against).

In the report, Victor Li, vice president, governance advisory and proxy analytics at Kingsdale Shareholder Services, argues that the increased shareholder opposition to compensation plans ‘is a culmination of two years of concern where the board has not been responsive or responsive enough to shareholders.’ Proxy Insight research shows that 82 percent of companies that had more than 10 percent opposition to their say on pay votes in 2015 encountered the same level of opposition last year as well..

Penny Rice, Shorecrest Group’s co-founder and managing director, who is also quoted in the report, attributes the rise in ‘against' votes to greater scrutiny by investors of compensation plans in recent years. A second reason is that  ‘several issuers have responded to lower than anticipated support levels, not by changing their plan but changing the way that they communicate that plan to shareholders.’ She believes issuers need to do a better job of clearly demonstrating how key performance measures support management’s strategy for long term growth in order to avoid negative votes.

Shareholder activism has also ramped up in Canada this year. Activist Insight reports that 63 percent of all proxy contests since 2010 have resulted in at least a partial victory for activists. To guard against being targeted by activists, better communication with shareholders is critical. ‘Issuers come away from proxy contests with increased appreciation for an active shareholder communication and engagement program,’ DF King senior vice president Susy Monteiro said in the report.

High levels of  votes opposing re-election of director elections have prompted  the Canadian Coalition for Good Governance (CCGG) to push for changes in the nomination process, the report says. These changes would allow shareholders who own three percent of shares or more to propose new directors. The move is regarded as comparable to the US approach to proxy access proposals.  Director elections are also big news in Canada this year because companies listed on the Toronto Stock Exchange are now reportedly required to issue a press release reporting  the results of director elections. ‘With this information out there publicly, most directors do not want to see a large withhold vote,’ Rice said in the report.

The report also highlights companies’  luke-warm reaction to gender diversity policies and advance notice proposals. Although seven Canadian provinces now have gender diversity requirements for issuers, the general feeling is that many boards still haven’t taken diversity seriously. Meanwhile, proposals concerning ‘advance notice’, a measure intended to ‘prevent a stealth proxy contest at a shareholders' meeting by providing a reasonable notice period and disclosure requirements for shareholder nominations,’ have been been some of the most heavily opposed this proxy season. That’s because companies’ use of vague wording has instead  turned the proposals into anti-takeover measures.

The report also reveals that Canadian companies seem to be reluctant to eliminate poison pills. The average support for poison pills is 94 percent. Although the Canadian Securities Administrators (CSA) is reviewing a proposal intended to reduce the use of poison pills, Li is among the experts quoted in the report who don’t see an end to the practice any time soon. ‘In fact, we believe there will be another round of innovation in poison pills in Canada, and ISS may soon establish the standards for ‘newer generation’ shareholder rights plans,’ Li states.

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