Consultative votes on executive
compensation (Say-on-Pay) should not be imposed on all Canadian corporations
March 8 /CNW Telbec/ - At a time when several
Canadian financial institutions are about to hold a non-binding shareholder
vote on executive compensation, the Institute for Governance of Private and
Public Organizations (IGPPO) states in a position paper made public today
that this process should not be imposed on all publicly traded companies.
"The arguments pros and cons a non-binding
vote by shareholders on executive compensation do not readily tip the
balance in one direction or the other. The sense of unfairness and the
frustration with some patent cases of excessive compensation have generated
a good deal of sympathy for more direct and vigorous measures to curb
extravagant compensation practices. Nevertheless, boards of directors fully
responsible and accountable for the governance of publicly traded
corporations do form the cornerstone of our system of corporate governance."
says Yvan Allaire, the IGPPO's chairman.
"Say-on-pay voting by shareholders may indeed
persuade more companies to hold consultations with important shareholders on
executive compensation prior to annual meetings. Of course, such
consultations are already possible and have been held for a good while with
many companies. However, it is claimed that without the threat of a formal
(and possibly negative) vote by shareholders, consultations are less
effective" adds Allaire
However, "the call for a non-binding,
shareholder vote on executive compensation is a small but significant shift
in responsibility for corporate governance away from boards of directors
towards shareholder. If corporate boards cannot be trusted to make the right
decision on executive compensation, how can shareholders rely on their
judgment for other equally important decisions?" says Allaire.
For their next annual meeting of
shareholders, several financial institutions have submitted to a vote by
shareholders the approach that the compensation committee took to set
executive compensation. This process was preceded, presumably, by
consultations between large shareholders and members of the boards of
directors of these companies.
"Yet, should the approach result in large,
indefensible compensation some years hence, no one could complain as
shareholders formally approved the process leading to these compensations"
adds the IGPPO's general manager Michel Nadeau
"In the specific cases of unsatisfactory
compensation practices, institutional investors should propose a say-on-pay
vote by shareholders in the future as a deterrent and a form of punishment
for delinquent boards. Ultimately, investors should be prepared to use their
right to vote (or "withhold" their votes) against specific directors in the
few cases where board members have clearly failed to act in a responsible
manner. " says Allaire.
"A shareholder non-binding vote on
compensations would foster a tighter link between executive performance and
their compensation, it is claimed; and this link should be expressed in
quantified, measurable terms to demonstrate to shareholders that executives
do deserve their compensation. However the performance of effective, high
level executives may not be fully captured by quantitative measures. Boards
of directors need to show judgment when evaluating an executive's
performance" adds Nadeau.
The IGPPO's complete Policy Paper is
available on the IGPPO's Web-site at
September 2005, the Institute for Governance of Private and Public
Organizations (IGPPO) is a joint initiative of HEC Montréal and
Concordia University (The John Molson School of
Business). The Institute is committed to promoting strong corporate
governance practices among organizations in Quebec
and the rest of Canada. Its operations
focus primarily on key management activities, namely defining the corporate
mission, evaluating strategic management and financial performance,
recruiting and compensating officers and managing risk. It achieves this
primarily through research, training, the issue of position papers and the
dissemination of information. The Institute commissions academic research,
organizes conferences and training seminars, takes part in public debates on
governance issues, reinforces governance-related skills and promotes
partnership and knowledge transfer.
For further information: Yvan Allaire,
Chairman of the Board, Institute for Governance of Private and Public
Organizations, (514) 340-6483; Michel Nadeau, General Manager, Institute for
Governance of Private and Public Organizations, (514) 340-6483