2016 Say on Pay in Canada.

Transcription

1 Executive Edition, Canada Say on Pay in Canada. About 90% support in recent years. January Issue 1

2 Key Findings Say on Pay ( SoP ) policies have been adopted by larger market cap companies in the Financial, Energy and Materials (Metals & Mining) sectors. A weaker TSR does not necessarily result in weaker SoP support from shareholders. Excessive compensation, non-rigorous performance goals, insufficient linkage between equity incentives and corporate performance are likely the factors for lower or negative SoP votes. Average positive support in 2016 is 91.5%, similar to the pattern in the last two years. Our broader research indicates that pay-forperformance is seen as one of the prerequisites for successful SoP. Canada adopted a different approach to shaping executive pay and SoP. Canadian companies do not simply follow the best practices or mandatory requirements of other countries. For example, without a mandatory requirement, our research indicates that 87% of publicly traded organizations have adopted a compensation clawback policy. What is the profile of adopters? A total of 150 Canadian companies have voluntarily adopted Say on Pay ( SoP ) votes for shareholders. One-fourth (25%) of SoP policies are adopted by the larger market cap companies (>$25 billion) and are mostly in key industries such as Financial, Energy, and Materials (Metals & Mining). Figure 1: Profile by sector Figure 2: Profile by market cap size 2% 3% 2% 5% Health Care Telecommunication Services <2B 2-5B 15% 6% 20% 28% 11% 8% Consumer Staples Information Technology Financials Utilities Energy Consumer Discretionary Industrials Materials 47% 23% 4% 3% 7% 16% 5-10B 10-15B 15-25B >25B 2

3 Executive Edition, Canada - January 2017 Who are the new adopters? The SoP movement continues to gain traction in Canada, with 13 new additions in As shown in Figure 3, 77% of the new adopters received a support level of 90% or higher, except for Ensign Energy Services (73.5%) and Alamos Gold (65.3%). Seven (54%) are from the Metals & Mining sector. Figure 3: New SoP adopters Company Industry For vote TSR* Quebecor Inc Media 98.1% 6.5% Bonavista Energy Corp Oil, Gas & Consumable Fuels 97.8% -67.7% Argonaut Gold Inc Metals & Mining 97.5% -29.6% WSP Global Inc Construction & Engineering 96.9% -64.6% Silver Standard Resources Inc Metals & Mining 96.5% 22.8% Pretium Resources Inc Metals & Mining 94.8% 39.7% Detour Gold Corp Metals & Mining 94.0% 51.8% Eldorado Gold Corp Metals & Mining 91.8% -53.3% WestJet Airlines Ltd Airlines 90.5% -37.6% Cineplex Inc Media 90.1% -1.4% Ensign Energy Services Inc Energy Equipment & Services 73.5% -54.5% Alamos Gold Inc Metals & Mining 65.3% -44.8% Tahoe Resources Inc Metals & Mining Accepted -24.1% * Total Shareholder Return ( TSR ) from December 31, 2014 to December 31,

4 Top 10 in Canada Figure 4 shows the top 10 companies in Canada with the highest SoP vote. In 2016, six of the top 10 companies scored 99% or higher, compared to nine companies last year. Kingsway Financial Services, Crombie REIT, Trican Well Service and Smart REIT were able to maintain their top 10 positions in Turquoise Hill Resources, which had the second highest SoP ranking in 2015, dropped 10% and fell out of the top 10 this year. Shareholders are being continuously critical. Figure 4: Top 10 SoP companies Company Industry For vote TSR* Pason Systems Inc Energy Equipment & Services 99.5% -8.3% Kingsway Financial Services Inc Insurance 99.4% -4.7% Crombie REIT Real Estate Investment Trusts 99.3% 6.1% Inter Pipeline Ltd ** Oil, Gas & Consumable Fuels 99.1% -34.8% Trican Well Service Ltd Energy Equipment & Services 99.1% -88.5% Russel Metals Inc Trading & Distribution 99.0% -33.5% Smart REIT Real Estate Investment Trusts 98.8% 16.6% Thomson Reuters Corp ** Media 98.8% 15.6% MacDonald Dettwiler & Associates Ltd Aerospace & Defense 98.7% -10.8% Methanex Corp Chemicals 98.7% -12.1% * Total Shareholder Return ( TSR ) from December 31, 2014 to December 31, 2015 ** S&P/TSX60 4

5 Executive Edition, Canada - January 2017 This downward trend was also observed outside of the top 10 companies. The average For vote dropped from 94% in 2011 to 91.5% in 2016 (Figure 5). At the same time, the percentage of companies with a 95% or higher approval rating dropped from 56% in 2011 to 48% in 2016 (Figure 6). Figure 5: Average For vote and TSR Figure 6: 95% or higher For vote and TSR 95% 140% 60% 140% 94% 120% 93% 100% 55% 100% 92% 80% 91% 60% 50% 60% 90% 40% 89% % 45% % Average For vote % of companies The data suggest that SoP standards continue to get tighter or shareholders are becoming less accommodating, particularly in the midst of declining financial performance. Shareholders opinions have generally been aligned with the TSR trend over the years. In any case, issuers have to do more and be smarter. Lessons Learned As of the date of this article, two companies received less than 50% shareholder support this year: Canadian Pacific Railway (49.9%) and Crescent Point Energy (31%). It is not surprising that both companies also received an Against voting recommendation from Institutional Shareholder Services ( ISS ). The main issues are: Above target payout of incentive awards during a period of sustained relative underperformance; Non-rigorous performance goals; Insufficient linkage between equity incentives and corporate performance; Misalignment between pay and performance; and Complex compensation structure. Crescent Point Energy: The organization overhauled its compensation program after receiving less than 60% support in 2013 but its new compensation approach, namely the Base Compensation structure (i.e., salary plus Cliff Grant of annual Base Restricted), was seen to be too complex and may lead to a disconnect between pay and performance, or excessive compensation. Canadian Pacific Railway: They received a negative SoP recommendation as a result of the relatively high compensation provided to the CEO that was not substantiated by superior performance. 5 5

6 Current and future landscape for Say on Pay Does SoP help improve corporate governance? Most people would say yes. At a minimum, SoP has raised expectations at the board level to be more transparent in articulating the approach to executive compensation. There has been more discussion of the compensation approach and decisions made in the management information circular. Korn Ferry Hay Group, in partnership with the Canadian Society of Corporate Secretaries, completed governance research in June, The research reveals that pay-forperformance (P4P) is seen as one of the prerequisites for successful SoP, with the following typical P4P ingredients: The organization s business strategy and market practices are the most impactful factors for both the final design of the executive pay program, and The board s decision on actual executive compensation is critical to the integrity. Our 2016 research shows that most boards of publicly traded organizations will meet with shareholders only if asked to do so. That being said, SoP will continuously prompt boards to engage with shareholders more proactively, recognizing the reputational risk (41% of boards reported this as their critical risk concern). Has SoP contributed to a better alignment between executive compensation and performance? The answer is less certain. Boards are fully aware of the importance of pay and performance alignment, considering the advice from their compensation consultant, the voting guidelines of proxy advisors, and the dialogue with institutional investors. Our research reveals that CEO pay-for-performance analysis is typically performed in 95% of publicly traded companies. The analysis is mostly made available to the boards for internal use. Financial measures, such as profit, revenue and cash flow continue to have the largest impact on payout for short term incentives. Is Canada behind other developed economies in regards to SoP regulations as it is still non-mandatory and nonbinding? The United Kingdom implemented two SoP votes an advisory vote on the approval of the annual report on remuneration and a binding vote on the forward-looking remuneration policy. The French National Assembly passed a bill on June 14, 2016 making it mandatory and binding to have an annual shareholder vote on the remuneration and benefits of managing directors of listed companies. The United States adopted SoP in 2011 and the Securities and Exchange Commission ( SEC ) has pressed ahead with the controversial CEO pay ratio and proposed rules relating to pay versus performance disclosure, hedging disclosure and clawback standards. It seems that less movement is occurring in Canada. Does Canada adopt a different approach to shaping executive pay and performance? The Ontario Securities Commission ( OSC ) has pledged to continue monitoring the development of shareholder democracy such as SoP to determine an appropriate regulatory response. On October 7, 2015, Mr. Harinder Takhar introduced a private member s bill in the Ontario Legislature (Bill 128) to amend the Business Corporations Act with respect to shareholder meetings and the adoption of an executive compensation policy. Regardless of whether there are legal requirements, the SoP movement in Canada is moving in the direction that balances the voice of shareholders and motivation for executives. 6

7 Executive Edition, Canada - January 2017 Authors Kennedy Lee e: kennedy.lee@kornferry.com t: Wiclif Ma e: wiclif.ma@kornferry.com t:

8 ABOUT KORN FERRY Korn Ferry is the preeminent global people and organizational advisory firm. We help leaders, organizations, and societies succeed by releasing the full power and potential of people. Our nearly 7,000 colleagues deliver services through our Executive Search, Hay Group and Futurestep divisions. Visit kornferry.com for more information. Korn Ferry All rights reserved.