2015 marks the first proxy season in Canada since the TSX mandated majority voting in director elections for all non-controlled issuers. Under the pressure of potential ballot defeats, Canadian directors and boards embraced a spirit of engagement and responsiveness to shareholder concerns at a level not seen previously in the market, and in line with other major developed markets’ responses to similar regulatory pressures. Among many of the changes, trends, and developments at Canadian issuers this proxy season, the continued increase in the voluntary adoption of management-say-on-pay proposals stood out. A close look at ISS data on the volume of and support for these resolutions underscores the significance of this development.

Voluntary Adopters Make Headway for Say-on-Pay

Over the last five years, an increasing number of Canadian issuers have voluntarily adopted say-on-pay proposals, giving shareholders the opportunity to opine on executive pay packages through the ballot. Already through the first six months of this year, the number of Composite index companies with pay proposals on ballot has eclipsed the total number from 2014. While the bulk of the meetings occurred in the first six months, this trend is expected to continue over the rest of 2015 and in future years, even if authorities do not mandate that pay proposals show up on ballots at Canadian issuers.

Despite the progress in adopting say-on-pay proposals for shareholder vote, there remains much room for further improvements. ISS Voting Analytics Database shows that currently 75 percent of the TSX 60, and 48 percent of TSX Composite issuers, have adopted voluntary say on pay.

Even Under Scrutiny, Pay Packages Pass Muster

While more executive pay packages are now subject to shareholder scrutiny, the level of pay given to executives continues to increase in Canada. According to ISS Executive Compensation Analytics (ECA) Database, median CEO pay at TSX 60 companies increased, by 2.8 percent thus far in 2015, but median CEO pay has increased by 10.8 percent at TSX Composite companies. A further analysis of ECA data shows that average median CEO salary has increased by 4.9 percent at both TSX 60 and Composite companies. Also, annual bonuses have increased by nearly 8 percent for Composite CEOs, and just over 7 percent for TSX 60 CEOs. Further, and much more significantly, compensation in the form of stock awards (including performance vesting shares, restricted stock or stock unit grants, or other stock awards) increased by 13.1 percent for CEOs in the Composite index, and 5.2 percent for TSX 60 CEOs, while the median value of compensation paid as stock options actually decreased by a little under 1 percent for TSX 60 CEOs, increasing by just 0.1 percent for Composite Index CEOs.

While ECA data shows that median CEO pay has increased since 2014, shareholder support for these proposals is strong so far in 2015, with an average of over 90 percent. Average support was highest at TSX Composite companies, at 92 percent according to Voting Analytics. While several companies did receive less than 90 percent support, for the first time in Canadian history, a majority of shareholders expressed dissatisfaction with pay packages at more than one company, as three companies have failed to receive majority support so far in 2015.

First, at its April 23 meeting, Canadian Imperial Bank of Commerce (ISS Governance Quickscore: 3; Compensation Pillar Quickscore: 4) received the support of 43.2 percent of votes cast (for/for+against). Shareholders were concerned that a large accelerated retirement pay package for the former CEO was not adequately linked to performance, leading to questions about both succession planning and ongoing pay after retirement. In particular, the company had an unusual retirement transition arrangement with the former CEO, which provided for a $16.7 million lump-sum cash payment for long-term incentive awards that would have been granted during the transition agreement timeframe. Next, on April 28, Barrick Gold Corporation (ISS Governance Quickscore: 4; Compensation Pillar Quickscore: 5), a company with a history of low support for compensation proposals, received just 26.6 percent of shareholder votes in favor of the company’s executive pay package. Shareholder votes were driven by the continued lack of long-term performance mechanisms in the chairman’s pay plan. These compensation-related concerns, in conjunction with problematic company performance, led to low support levels for the say-on-pay vote. Finally, on April 29, shareholders at Yamana Gold (ISS Governance Quickscore: 8; Compensation Pillar Quickscore: 10), voted down the company’s say-on-pay proposal with just 37.3 percent support. Shareholder concerns centered around high overall levels of pay awarded, including a special bonus to the CEO, while company performance declined on both a relative and absolute basis.

Going Forward

Several other issues have made significant progress in Canada, with the results of that progress showing up this past proxy season. Board gender diversity increased, more companies adopted strong anti-hedging policies, as well as official annual performance evaluations for board members, and director tenure is now an issue that boards are taking into consideration. All of these data points, and many more, are available on ISS’ QuickScore platform.

ISS will release its 2015 Canadian Proxy Season Review later in the summer, utilizing much of this data, and providing in-depth analysis of the trends and what they mean for Canadian governance, as well as a look into Q4 and beyond. –Rob Yates, ISS Research