Thought Capital

Shareholders are taking a much more active role in overseeing their investments, scrutinizing board oversight more closely. In order to enhance governance, and to ensure independence and diversity of skills, shareholders are encouraging boards to evaluate their members, their composition and their renewal process. At the same time, as the expectations placed on directors grow, shareholders are discouraging directors from joining too many boards.

Since the financial crises of 2008, there has been a lot of media and academic attention on mitigating against excessive risk-taking and addressing the problem of “short-termism” – pressure to produce short-term results. As it relates to equity compensation and short-termism, there is an argument that we have actually taken a step backwards – albeit unintentionally.

Reflecting our firm’s continued commitment to our shareholder engagement practice, Hugessen reached out to the shareholder community in the fall of 2014 looking to discuss the key areas of focus for the upcoming 2015 proxy season. Hugessen initiated 12 conversations with large Canadian institutional shareholders, including pension funds and asset managers representing total assets under management of $2 trillion (n=9) and advisors (n=3).

Proxy advisory firms Institutional Shareholders Services (“ISS”) and Glass Lewis (“GL”) recently released updates to their 2015 voting guidelines. ISS has not changed existing or adopted any new compensation-related policies. Glass Lewis has made two compensation-related changes: i) clarified an enhanced policy regarding one- time equity. grants, and ii) expanded the list of considerations that may mitigate an ‘against’ vote recommendation when a company fails their pay-for-performance (“P4P”) test. Both ISS and GL have amended policies related to director elections.

To date, stock options have been the dominant form of equity-based compen- sation (or “equity pay”) for small and mid-size publicly-traded companies in Canada. As a result, stock options are generally very well understood, and it has become relatively simple to design and administer these types of compen- sation plans.

A board’s best defence in the say-on-pay era? Conduct an independent pay-for-performance assessment, then communicate it to your shareholders.

The frequency of shareholder proposals and their levels of support are gradually gaining steam in Canada. Directors are wise to pay heed. If your board isn’t a target today, it might be tomorrow.

With the 2014 proxy season now behind us, compensation committees may be feeling the pressure to respond to below-par Say-on-Pay results and/or director support levels and other criticism received from shareholders and their advisors. Adding to this pressure is the lack of a clear process for gathering the views of the shareholder community in order to inform the board’s review and decision- making process.

With most of the large issuers in Canada having completed their annual general meetings, Hugessen has summarized our high-level observations of key executive compensation and governance trends from the 2014 proxy season.

Directors need to acknowledge the increasingly active role of shareholders and their advisers in executive compensation decision making—and then engage shareholders directly to hold sway over the agenda.