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Each spring, the spotlight falls on excessive executive pay with proxy season disclosures for annual shareholder meetings. Agitated investors froth at the newly divulged disconnects between high compensation packages and mediocre financial performance. CIBC, Barrick Gold, Onex, Air Canada, Loblaw Cos., MDC Partners and Yamana Gold were among this year's examples.

The assumption that equity-based compensation for executives aligns their interests with the shareholders ("I am one of you," Barrick chair John Thornton unabashedly told shareholders last month) is undermined when disproportionate stock incentives are awarded by company directors. There is growing skepticism about the idea that particular CEOs are indispensable, that their talent is rare and limited. The risk of losing a CEO has been overstated; the rare ones who actually move companies from "good to great" share credit, take blame, are moderate in lifestyle and push corporate performance relentlessly.

In the business realm, executive compensation is not about societal inequalities of wealth and income. Comparisons with average workers' salaries or median incomes are metrics more appropriate for political, social and moral perspectives – CEO remuneration should be assessed within a competitive, market-based economy.

In the private sector, corporate pay is not subject to formulaic standards and knowledgeable investors do not prefer prescriptive checklists to judge remuneration. "Pay for performance," even when it results in large rewards, is generally supported – acknowledging that there is a broad range of reasonableness within which principled decisions may be made, depending on an organization's corporate strategy, financial aspirations and business-plan objectives. One Canadian academic study indicated that CEO pay and performance in the TSX 60 were "largely heading in the same direction" during the 2004-2011 period. But that doesn't mean that pay increases were aligned with increases in total shareholder value, or that they reflected pay for performance. Too frequently, cases of "pay without performance," oversized, one-time incentive stock grants and retirement "golden parachutes" bring into question those boards' commitments to act in stakeholders' best interests.

Shareholders should not be exercising the business judgment that determines corporate wages. The board of directors is responsible for compensation policies and practices. But independent board chairs need to step up publicly to their obligations for governance leadership. A board and its compensation committee must be accountable for their actions, and accountability requires consequences. Shareholders are not currently permitted to vote against the election of an individual director, being restricted to the ineffectual and superficial alternative of withholding their votes. They are thereby denied fundamental shareholder rights – not only in the election of directors, but also in replacing complacency, disrupting "group think" and removing cheerleaders. Majority voting policies for director elections cannot equate a vote withheld with a vote against.

In addition, more direct disclosure is needed to support enhanced corporate accountability. The U.S. Securities and Exchange Commission recently announced a proposal to deepen transparency on executive pay. The SEC would require U.S. reporting issuers to reveal the "actual" value of CEO stock awards. Actual value is the vesting-date value, rather than the currently reported theoretical "grant date" value. In addition, the CEO's total actual compensation would be compared to the total shareholder return of the company and its peers. Increased disclosure of pay versus performance, while not perfect, does remove another layer of opaqueness for investors. As it stands, C-suite executives' actual pay is not commonly made available to boards.

Most Canadian boards did not welcome advisory shareholder "say-on-pay" votes after they were adopted in Britain in 2002. Instead, they ragged the puck until they felt pressured to do so. The SEC implemented rules requiring U.S. reporting issuers to hold non-binding advisory shareholder "say-on-pay" votes. But Canada's 13 securities administrators have maintained their characteristic inactivity on the shift to "say-on-pay" models and Canadian boards determine their own degree of shareholder engagement. Studies have differed on the impact of North American shareholder advisory votes on corporate compensation. In Canada, there has been no discernible ideological shift on CEO compensation policies and few adjustments after negative "say-on-pay" votes.

Shareholders should move from the spectator stands into the active arena when they believe compliant directors are prone to acquiescing to executive-suite influence and to favouring short-term management value extraction over long-term corporate value creation. Petitioning for authentic shareholder rights to elect directors is a path forward.

Garfield Emerson, a corporate director and lawyer, publishes governancecanada.com.

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