Expect the emphasis on compensation issues to continue into next year.
Canadian proxy season seems to offer a lot less drama this year, as many developments surrounding shareholder democracy, executive compensation and other governance issues are being dealt with quietly out of the spotlight. Most observers believe positive movement is still happening on a number of fronts, but no big policy changes that significantly change proxy plumbing for issuers have emerged.
‘Up here in Canada, there are all kinds of issues flying around regulatory bodies and commissions like slate voting, majority voting and shareholder advisory say-on-pay votes – but we haven’t heard anything from our regulatory bodies,’ says Georgeson Canada chief operating officer Roy Shanks. ‘There’s just ongoing discussion.’
‘Proxy season hasn’t really offered a lot that’s new,’ says Laurel Hill Advisory Group senior vice president Brad Allen, pictured left.
While there may not be a whole lot that’s new, however, there are still several important proxy-related developments that will impact issuers in 2012.
Disclosure of proxy voting results
Getting companies to disclose the results of proxy votes from annual meetings has been more difficult than many investors would like, so proxy firms are putting increased pressure on them to be more transparent. Approximately 52 percent of the companies in the S&P/TSX Composite willingly disclose their votes – about 38 percent refuse.
Companies should know that Glass Lewis has changed its view on this. ‘For companies in the S&P/TSX Composite, we will now recommend that shareholders withhold votes from the chairman of the nominations and corporate governance committee (or chairman of the board) if a company fails to disclose detailed vote results from its previous annual meeting,’ Glass Lewis says in its Proxy season preview 2012.
‘Although we will not apply this policy to companies outside of the Composite, we will note a board’s failure to disclose proxy voting results in our report, and may consider making this policy more stringent in the future.’
Allen says that Glass Lewis’ new stance ‘should hopefully result in greater transparency, as investors want to know exactly how much support individual directors are getting.’ He also maintains that ‘It will put more pressure on companies to adopt majority voting and individual director elections.’
More scrutiny of compensation plans
While it’s no surprise that compensation remains a major issue during proxy season, how those plans are looked at is constantly changing.
‘Now ISS wants to know how you scored on every part of the compensation report card,’ says Riyaz Lalani, pictured right, chief 
operating officer of Kingsdale Shareholder Services.
He adds that among the things ISS will look at are the performance of your company against the industry index, performance against your peer companies and, if you have underperformed in either of these, compensation of C-suite executives. Lalani says ISS will be most interested in determining how much your compensation for C-suite executives has increased, and why.
‘If compensation has risen substantially, ISS can issue withhold votes on your compensation committee or on the entire board,’ he explains.
Allen says issuers can expect the emphasis on compensation issues to continue into next year. ‘I think there will continue to be more eyes looking at and wanting to take apart the compensation process – looking at the compensation committees, the advisers, the audit committee,’ he states. ‘It’s just another development in the overall risk assessment that boards increasingly need to be fully protected against these days.’
More companies plan say-on-pay votes
Glass Lewis reports that more companies have confirmed their intention to adopt non-binding say-on-pay votes in 2012. At least 82 companies have confirmed that they will use the practice, up from 42 in 2011.
‘Given the rapidly growing acceptance of say on pay as a fundamental shareholder right, we expect to see more companies adopt this practice in 2012, either voluntarily or as a result of shareholder engagement or resolution,’ says Glass Lewis in its proxy season preview. ‘While no Canadian company has received majority opposition to a say-on-pay vote as of yet, an increasing number of companies have seen noteworthy disapproval (10 percent to 25 percent), a trend we expect to continue in 2012.’
Impact of proxy advisory firms
The hot-button issue of proxy advisory firms is certainly not new, but Chris Makuch, vice president, national sales and marketing at Georgeson Canada, says, ‘There is a lot more interest over the last two years on the impact and role of ISS and the other proxy advisory firms – it has trended a little higher on the list of issues that people need to understand.’
Of particular concern is how these firms’ recommendations can affect votes on governance matters at publicly traded companies. Shanks says firms like his have seen companies making a greater effort to try to understand all of the ways in which proxy firms can influence outcomes.
‘They are approaching us to get a better understanding of the proxy advisory firms, Glass Lewis and ISS, and the role they play in mergers and acquisitions, friendly mergers, shareholder meetings with compensations issues, stock option plans and the like,’ Shanks reveals.
The true impact that proxy firms have on corporate policy-making and shareholder actions will certainly be debated again this proxy season as issuers await the outcome of an investigation of a recent SEC whistleblower claim that embodies their worst fears. In February, the New York Post reported that an employee of a proxy solicitation firm claimed that an employee of ISS has allegedly been selling information about how institutional investors will vote in upcoming shareholder meetings. If knowledge about an institutional investor or large shareholder’s position is leaked weeks before a critical vote, these parties could be coerced to change their vote, affecting everything from board composition to the passage of critical governance measures or the actual takeover of a company.
That said, ‘the fact is that ISS and Glass Lewis don’t really have, in most contentious situations, the support that people infer they have,’ says Allen. However, he acknowledges that this allegation just makes management more sensitive about being subjected to proxy advisory firm recommendations.
Shareholder activists
Talk of takeover attempts against Research in Motion, Canadian Pacific Railway and other larger Canadian companies has put shareholder activism in the spotlight this proxy season.
Dissident shareholder activity is picking up, and it appears more companies are finding themselves at risk of takeover attempts. ‘It used to be that shareholder actions only affected smaller companies,’ says Lalani. ‘Now you are seeing much larger companies come under scrutiny.’
Lalani says that more companies are taking out ‘defensive retainers’ because they are increasingly concerned about, or actively dealing with, dissident shareholders. Developing defenses to keep activist shareholders at bay is new territory for many.
‘Companies with a lot of cash on their books and companies that have performed poorly are both being targeted,’ Lalani notes. The reason: shareholder returns have not been strong, so the market has moved to hostile bids for attractive companies whose valuations have lagged. ‘Acquirers are finding that it is cheaper to buy rather than build,’ he says.
Particularly vulnerable are mining and natural resource companies that derive much of their value from commodity prices. Commodity prices have been off the charts lately, but ‘junior producers of commodities are not getting the valuations they were expecting,’ says Lalani. ‘They are like sitting ducks.’
Allen says the fact that larger, higher-profile companies have become targets of shareholder actions has not gone unnoticed by boards across the country.
‘Large-cap and mega-cap companies are realizing that they too could be in this situation if they don’t watch themselves,’ he says. ‘They too could find that they are not untouchable.’
After enduring a global economic slowdown, investors are no longer willing to sit and wait for management to turn a profit for them. They are beginning to push management to return money to shareholders, one way or another. ‘Investors are realizing that they have other options that they can use to affect what happens at companies in which they own shares,’ says Lalani.
Regulatory adjustments
Glass Lewis reports that it will be on the lookout for changes that regulatory bodies have implemented in 2011. The Toronto Stock Exchange announced several amendments to its listing requirements last year, which will become effective this year on approval by the Ontario Securities Commission. According to Glass Lewis, ‘If enacted, the proposed amendments would: (i) prohibit the use of slate elections and require that each director be submitted for election individually on an annual basis; (ii) introduce a ‘comply or explain’ majority voting requirement; and (iii) require issuers to disclose when a director fails to receive majority support from shareholders in an election if they have not adopted majority voting.’
The Canadian Securities Administrators also has a disclosure requirement (Form 51-102F6) that applies to issuers with fiscal years ending October 31, 2011 and later. Glass Lewis reports, ‘The new form requires, among other things, that issuers describe the policies and practices adopted to determine compensation for directors and executive officers as well as any fees paid to compensation consultants or advisers for the past two years.’
New shareholder proposals in 2012
Also under the banner of shareholder activism are governance-related proposals that seem to be drawing more interest from shareholders. Based on its analysis of proposals that were filed in 2011, Glass Lewis is projecting a higher number of requests to separate the role of chairman of the board and CEO and more requests that majority voting be adopted in 2012.
Additionally, ‘Shareholders have recently submitted several new environmental and social proposals to Canadian companies in anticipation of their annual meetings. Specifically, these proposals include requests for reports on climate change, human rights, and environmental impacts,’ Glass Lewis reports.
For companies that don’t want to be caught off-guard by new proposals such as these, experts continue to emphasize talking with shareholders on a regular basis. ‘Issuers need to be engaged with their shareholders, talking to them and being out ahead of the annual meeting,’ urges Shanks. ‘Be in the know and open up the dialogue.’
Of course, this is the same advice proxy solicitation firms delivered last year and at least 10 years before that – that is, you have to know your shareholders. Companies have responded by executing that message and expanding on it to include knowing the major proxy advisory firms as well.
‘The education of companies has progressed a long way, and with that, they’ve changed how they manage the issues,’ explains Makuch. ‘That may be the reason why there aren’t as many problems this year.’
