Executive pay disclo-sure has existed in Canada since the mid-1990s. Apart from inspiring envy and arming executives to demand ever-bigger pay packages, it’s not clear if it has aided investors. Now, regulators aim to overhaul the rules and make companies exhibit more candour.
The ostensible reason for requiring companies to disclose the pay packages of their top executives is to give shareholders an opportunity to assess the value of the managers they are paying. Ideally, the prospect of disclosure would also be enough to prevent managers from loading up too egregiously at the corporate trough.
Unfortunately, the disclosure currently required doesn’t seem to accomplish either objective. The problem is that it’s simply too difficult to determine exactly what executives are paying themselves in any given year, and why.
The rise of equity-based incentives, which have a value only when they are exercised — typically, years after they were granted — has made it tricky to come up with a hard number for an executive’s pay in a given year. Moreover, the number and variety of compensation mechanisms has proliferated, making it still more difficult to divine exactly how much executives are receiving.
Additionally, issuer compliance with the spirit of the existing rules has often seemed half-hearted.
Investment Executive has examined the compensation disclosure at financial firms over a number of years, often turning up errors or impenetrable reporting, and discussions that provide little meaningful insight into the factors that determine compensation. Boilerplate language and empty platitudes are the order of the day in many firms’ proxy circulars.
In an effort to combat some of these failings, the Canadian Securities Administrators is proposing a reform of the existing rules.
The proposed amendments would require firms to do more number crunching on behalf of shareholders by introducing a new requirement to disclose total compensation in the table that summarizes executives’ pay. They also demand issuers expand their discussion of, and provide rationales for, the various forms of remuneration they use. They will require that firms report the cost of various equity-based forms of compensation rather than just the number of shares or units granted. The proposed amendments also seek to expand the quality of disclosure around executives’ possible termination benefits, including retirement packages. Additionally, the updated rules call for expanded disclosure of directors’ compensation, including a summary table and reporting of equity compensation that’s similar to what is required of executives.
The CSA hopes to have its new disclosure regime in place by the end of the year, and the amendments are out for comment until June 30. If and when they are adopted, the CSA hopes its proposed reforms will provide more clarity to investors without being overly prescriptive, particularly compared with requirements that were recently adopted by the U.S. Securities and Exchange Commission.
The SEC’s new rules on executive pay disclosure are parallel to the proposed new Canadian rules. In particular, the SEC rules call for the introduction of a summary compensation table and a discussion and analysis section. The SEC and CSA regimes diverge in some of the details, however, and the CSA has designed its effort to be more principles-based.
For example, the CSA proposals differ from the SEC rules in that the former don’t demand as much detail in parts of the summary table or in the disclosure of retirement plan benefits. The CSA doesn’t require the CEO and CFO to certify the discussion and analysis, as the SEC does. And the two regulators also have different thresholds for reporting executive perks. The SEC also allows smaller companies to disclose information about a smaller group of executives than is required for larger firms.
The CSA’s proposed amendments also do not include a plain-language requirement; they simply encourage companies not to use boilerplate language in their discussion of compensation practices.
If the U.S. experience is any sort of guide, making compensation disclosure investor-friendly is going to be a challenge. The SEC is finding that, so far, companies are doing a pretty appalling job of complying with its new regime.
“Now that the proxy season is well underway, and we’ve reviewed the first of this year’s crop, alarm bells are ringing,” SEC chairman Christopher Cox recently said in a speech in Los Angeles.
He says the SEC is disappointed in the continued opacity of the disclosures it has seen so far. For one thing, many are far too long: “Already we’re seeing examples of over-lawyering that are leading to 30- and 40-page executive compensation sections in proxy statements.”
@page_break@Not surprising, the extended epistles aren’t running long because they are elegantly written, compelling narratives. Rather, the SEC found that they remain larded with the sort of jargon and legalese that afflicts most corporate disclosure documents. Cox says that independent testing and the SEC’s own observations have found that firms reporting under the new disclosure regime are failing the readability test.
It seems unlikely that Canadian firms will do much better — unless they are forced to do so by the regulators. As part of a cost/benefit analysis that is being carried out by the Ontario Securities Commission, firms can weigh in on the value of a plain-language requirement, and the cost they would face if it were imposed.
Regardless of whether regulators decide that companies must be forced to speak in plain language, they have determined that compensation disclosure must be improved. A preliminary qualitative analysis by the OSC concludes that the status quo is “not an option.” The reforms that the CSA envisions should benefit investors without imposing much in the way of cost on issuers, beyond the initial expense of rejigging their reports to disclose their pay data in the new format.
Certainly, if the big banks’ proxy voting season is anything to go by, shareholders remain interested in executive compensation issues, whether they see these matters as indicators of the quality of corporate governance or as significant investment considerations.
The banks are typically at the forefront of corporate governance developments in Canada. According to Toronto-based proxy voting service Institutional Shareholder Services Canada Corp. , shareholder proposals dealing with executive compensation issues were the most popular with bank shareholders in the latest round of annual meetings.
A new report from ISS Canada indicates that the Big Six banks faced a total of 18 shareholder proposals relating to executive compensation in 2007, garnering average support of 9.9%; that’s more support than the proposals dealing with either director-related issues or governance-related issues received. Indeed, in each of the past four years, executive compensation proposals have, on average, generated more shareholder support than any other type of proposal (apart from environmental and social proposals, but there has been no more than one proposal in that area in any given year).
This year, the various banks faced proposals concerning executive compensation from both individual shareholder activist Bob Verdun and Quebec’s Mouvement d’education et de defense des actionnaires. The most popular proposal was MEDAC’s call for the banks to disclose information about the compensation consultants they use. This proposal garnered more than 80% support from shareholders at National Bank of Canada after its management recommended shareholders vote in favour of the measure. It also won more than 10% support at TD Bank Financial Group and Bank of Nova Scotia, and just under that mark at the other big banks. The proposal was withdrawn at CIBC after it voluntarily disclosed the information in its proxy.
Verdun also withdrew a compensation-related proposal from all of the banks, except for Bank of Montreal, which called on them to ensure that their compensation is simple, transparent and retractable in certain circumstances. At BMO, that proposal received 7.7% support.
Executive compensation proposals were not just more popular than other kinds of shareholder issues this year, but compensation-related proposals also attracted more support this year than they have in the past couple of years. According to ISS Canada, executive compensation-related proposals attracted slightly more than 6% support on average in 2005 and 2006. And there were also more executive compensation proposals on the banks’ ballots this year than in past years.
In the future, if regulators manage to improve issuers’ disclosure, shareholders may finally get something other than sticker shock when reading their favourite companies’ proxies. IE
Beefing up execs’ disclosure
CSA wants firms to provide much more detail on what they pay top brass
- By: James Langton
- April 30, 2007 April 30, 2007
- 10:34