Shareholders increasingly draw line in sand on executive pay

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Resource companies garnered some of the lowest levels of support from shareholders in the most recent annual votes on executive compensation practices at Canada's largest companies.

A survey of say-on-pay votes by Toronto-based consulting firm Global Governance Advisors shows overall support for executive pay programs averaged 89.7 per cent in Canada, down from 91.5 per cent last year and 94.3 per cent in 2011.

Of the eight firms that earned less than 80 per cent support, six are resource companies, including Barrick Gold Corp., Kinross Gold Corp. and Canadian Natural Resources Ltd. The two non-resource companies were Canadian Pacific Railway Co. and Magna International Inc.

The review tracked the 58 of Canada's 100 largest companies that held say-on-pay votes – voluntary ballots that allow shareholders to say whether they approve of executive pay practices – in their most recent annual meetings. The number of top-100 companies that held such votes in the most recent round rose from 52 in the year-earlier period. The vote results are advisory and not binding.

Paul Gryglewicz, managing partner at Global Governance Advisors, said shareholders appear particularly willing this year to vote "no" to pay practices when they were not aligned to performance last year.

According to the survey's results, Canadian shareholders are most likely to vote against executive compensation practices when a company's share price has been falling and there appears to be a disconnect between high CEO pay and weakening performance.

Canadian companies that saw their say-on-pay voting result decline by at least 10 per cent this year – including Barrick, which garnered just 15-per-cent support for its pay practices at its annual meeting in April – posted negative total shareholder returns in 2012.

"We're still only a few years into this whole say-on-pay mechanism, but there are patterns that are starting to evolve," Mr. Gryglewicz said. This year's say-on-pay survey is Global Governance's third.

Say-on-pay votes have been introduced in Canada over the past four years, and trends have been slowly emerging to explain when companies will most likely see shareholder support drop. Mr. Gryglewicz said the small but steady overall drop in support suggests shareholders are growing somewhat more willing to use "no" votes to express their concerns.

"It appears that shareholders are getting more comfortable with the tool and are starting to be more vocal with the voting," he said.

Barrick was the only company in the top 100 to lose its say on pay vote last year, (meaning that more than half of shareholders who participated in the ballot voted no), after facing protests by major institutional shareholders over the $17-million in compensation paid to vice-chairman John Thornton in 2012. Barrick received 96-per-cent support in its say-on-pay vote last year and just 15 per cent this year.

Two smaller companies outside the top 100 also failed on their say-on-pay votes this year with Equal Energy Ltd. garnering 44 per cent support and Golden Star Resources Ltd. reporting 38-per-cent support. MDC Partners Inc. reported its vote passed with just 50.2-per-cent support.

Resource company executives haven't been helped by the performance of the products they sell, at least as of the time of their most recent annual meetings. Bank of Canada's Commodity Price Index, which includes prices for oil, coal, gold as well as grains and livestock, declined in 2012. The index, which had increased in eight of the last 10 years, fell to 633.68 from 674.23 in 2011.

Baytex Energy Corp. saw its vote fall to 78 per cent from 94 per cent in 2012, while Canadian Natural Resources garnered just 56-per-cent support compared to 85 per cent last year. Talisman's vote fell less dramatically to 75 per cent from 88 per cent in 2012. All posted negative total shareholder returns last year.

Mr. Gryglewicz said the voting results may simply indicate that shareholders are using their say-on-pay votes to protest the companies' weaker financial results in the prior year, rather than commenting on specific concerns about pay practices.

But he said the same companies also were among the group most likely to have the highest CEO pay levels for 2012 while performance was weakening, which could provide a clearer rationale for the voting behaviour.

Global Governance also found the opposite trend was true, with companies showing the greatest improvement in their pay vote also showing improvement in their financial results. Agnico Eagle Mines Ltd., for example, saw its pay vote improve to 81 per cent from 64 per cent last year while also reporting a 43-per-cent increase in total shareholder returns in 2012.

The only exception was Agrium Inc., which saw its pay vote drop to 82 per cent support this year from 97 per cent last year, even though total shareholder returns rose a healthy 47 per cent last year. The vote appeared to be more affected by the company's divisive proxy battle with a dissident shareholder at the time of its annual meeting.