Every AGM and proxy season has its seminal, defining moment—the shot across the bow that sends a message not to just one board, one set of directors, one company, but to every board and every director in the land.
This year, that moment was probably Barrick Gold Corp.’s (TSX:ABX) annual general meeting in April, when in a non-binding, advisory say-on-pay vote shareholders resoundingly rejected a $17-million packet for new co-chair John Thornton, a former president of Goldman Sachs. That package included an $11.9-million signing bonus Thornton used to buy shares and came at a time when Barrick’s share price had been hammered. In all, more than 85% of shareholders voted no. They also took it out on individual directors, withholding up to 28% of the vote for some directors involved in crafting the pay plan.
Barrick chairman and founder Peter Munk gave a predictably spirited defence of the Thornton deal, but noted the company, which also trades on the NYSE, would review the vote. And with that, corporate governance experts put another victory in the win column for institutional shareholders—and now say we should expect still more flexing of new-found muscle as they take on Canada’s old guard and companies that refuse to change.
It’s not just about pay. Corporations should expect harsher scrutiny on everything from strategy to governance, performance of individual directors and even appointment of auditors. That means public companies need to take shareholder communications more seriously, says Richard Leblanc, a corporate governance professor at York University in Toronto. “Shareholders are beginning to exert their rights. They are breaking down the old guard and the old boys’ way of thinking.”
Carol Hansell, a lawyer at Davies Ward Phillips & Vineberg LLP, warns, “People are prepared to put money up and if they can convince their fellow shareholders that they can build the mousetrap better, they may succeed.”
By the time the Barrick vote was held, the outcome wasn’t that much of a shock. Days before the vote, eight institutional investors, which collectively manage $916 billion in assets, issued a release stating: “This compensation is not consistent with the governance principle of pay-for-performance and is therefore disproportionate. It sets a troubling precedent in Canadian capital markets.”
In his defence of the deal, Munk touted Thornton’s international connections in an environment where foreign governments are threatening miners. He compared Thornton’s acquisition cost to buying some shovels and tractors. “I promise you that John will do more for Barrick than six more shovels.”
In Canada, say-on-pay votes are voluntary. In the U.S., regulators mandate votes—but companies can also reject the end result. However, U.S. public companies must also disclose the results of the pay vote in their regulatory filings and include a discussion about the issue.
Despite their advisory nature, say-on-pay votes are changing the way companies operate in the U.S., says Mark Borges, an executive compensation expert. “People are taking them seriously,” he says, noting that nobody wants to be the latest headline of a failed compensation vote. “There are certainly more concerted shareholder engagement discussions.”
He says only 5-8% of companies fail their say-on-pay vote and most will address share- holder concerns because they don’t want a second negative vote. “Most companies have done a pretty good job of cleansing their [compensation] programs of egregious features,” and he expects that the same will hold true in Canada as more companies adopt say-on-pay.
Only about 100 Canadian companies have adopted say-on-pay votes as a policy but more are expected to follow suit, as organizations such as the Canadian Coalition for Good Governance and proxy advisory firms like Institutional Shareholder Services push for more transparency on executive compensation.
Poonam Puri, a professor at Osgoode Hall Law School, says, “This vote may serve as a wake-up call for Canadian companies and underscores the importance of effective share- holder consultation when developing their executive compensation policies. My sense is that we are seeing a shift in the balance of power between shareholders and directors.”
The Barrick vote stresses the need for companies to beef up their shareholder commu- nications, adds Lynne Lacoursière, a foreign legal consultant at Torys who follows executive compensation issues. “I think it’s really just using your disclosure as your key tool to explain to shareholders what your compensation package is and your reasons behind the decision and the philosophy. Disclosure is a powerful tool to get your point across.”
Leblanc adds that “say-on-pay has been the catalyst for shareholder engagement” and he expects such discussions will expand into many other areas than simply pay. He cites the recent fight between Canadian Pacific (TSX:CP) and Bill Ackman and Agrium (TSX:AGU) and Jana Partners as examples of votes on strategy.
Another area that will see more activity is poison pills. As we reported last issue, the Ontario Securities Commission has issued a proposal on poison pills that will give shareholders more say over how companies can deploy them to fend off takeovers.
Most observers also say that voting will soon evolve to include the election of single directors, rather than slates, and for shareholders to have more say in things like auditor appointments. Also expect to see shareholders target directors on specific committees where dissatisfaction is involved, such as the audit committee in the case of a financial scandal or the compensation committee in pay votes.
Simon Romano, a lawyer at Stikeman Elliott calls the increase in shareholder activism an “evolutionary process. Negative votes are a part of that evolution.”
He expects to see more input from shareholders over things like empty voting, where a shareholder obtains voting rights in a company, but has no economic interest. That was the situation Telus (TSX:T) faced last year in its fight with hedge fund Mason Capital. Telus wanted to eliminate its dual-share structure with a one-to-one conversion. Mason had both long and short positions in Telus voting and non-voting shares, and if the spread be- tween the two classes of shares widened, Mason would benefit. A B.C. judge ruled against Mason’s attempt to stop a shareholder meeting to vote on the consolidation plan, calling it an “opportunistic investor.”
Romano said boards are “thinking about these things with new vigour.”
As Munk noted at his annual meeting in April, “Bad times bring out more people.” According to governance experts, this is only the beginning as institutional shareholders seek to have more say in the companies they invest in.
“It’s a welcome breath of fresh air,” says Leblanc.