The big banks are the canaries in the coal mine of Canadian corporate governance. As a result of the shareholder proposals they receive, the banks are often among the first public companies to detect the hot issues of the day. This year, the canaries are facing a variety of new activist emissions, including initiatives to give shareholders a bigger say in executive compensation.

Typically, the banks are the primary targets of early efforts to improve corporate governance. They make a good launching pad for new ideas because they are widely held. Activists are able to get plenty of attention from shareholders for their issues. In addition, the banks have proven to be fairly responsive to issues that have been brought before them over the years. And if these issues fall in line with shareholders’ requests, it becomes that much easier to make similar demands of a broader range of companies.

This year, one of the biggest topics that the banks and their shareholders are likely to confront is the issue of executive compensation. According to a database of shareholder resolutions compiled by the Vancouver-based Shareholder Association for Research and Education, a couple of shareholder proposals on the subject will be brought before each of the major banks.

As Investment Executivewent to press, none of the Big Five banks had filed their proxy circulars; they are expected to do so throughout February. However, the database maintained by SHARE reports the resolutions that have been submitted by shareholders. This doesn’t mean that all these resolutions will necessarily appear on the banks’ circulars and go to a vote at their annual meetings. Sometimes, proposals are withdrawn or omitted for some reason. Also, additional proposals may come from unexpected sources.

Take, for example, the one bank that has filed its proxy: National Bank of Canada. The SHARE database had captured all but one of the proposals that actually made it into the circular. So, if National Bank is any guide, it’s clear that the Big Five banks will be facing a slew of shareholder proposals this year.

National Bank has 20 shareholder resolutions up for consideration. The other banks aren’t likely to face as many issues, given that 10 of National Bank’s proposals are from a single shareholder — and a number of them address bank-specific issues surrounding its involvement with asset-backed commercial paper. Also, the SHARE database indicates that this shareholder hasn’t filed similar proposals with any of the other banks. Nine proposals from Montreal-based investor advocate Mouvement d’»ducation et de d»fense des actionnaires, however, are much more likely to turn up on the other banks’ proxies.

Between SHARE’s database and the one bank proxy circular that has been filed, it’s clear that executive pay is likely to be at the top of the list of issues that are preoccupying investor advocates this year.

According to the SHARE database, socially responsible mutual fund manager Meritas Mutual Funds of Cambridge, Ont., will be calling on the Big Five banks to introduce a shareholder advisory vote on executive compensation.

The idea is that management will be required to propose a resolution inviting shareholders to ratify the report of a company’s compensation committee. Essentially, this mechanism is designed to give shareholders the opportunity to say whether they favour the executive pay packages that are being handed out. An advisory vote doesn’t actually empower shareholders to deny executives their compensation, but it does give them some voice on the subject.

MEDAC is taking the idea a step further by calling for shareholders to get a direct vote on both executive compensation and the fees paid to boards of directors.

In National Bank’s circular, MEDAC argues that shareholders should have the right to approve the compensation of the five most highly paid executives and directors: “The current practice is archaic and demeaning for shareholders, who are relegated to a rubber stamping function at annual meetings.”

The notion of giving shareholders a so-called “say on pay” has been around for a number of years and has been adopted in various ways in different jurisdictions. Non-binding advisory votes have recently been introduced in Britain and Australia; binding votes are being adopted in various European countries in the next couple of years. Only now does it appear that the issue is getting serious attention in Canada. But it’s not clear whether it will manage to gain any traction with shareholders.

@page_break@In National Bank’s case, the board is recommending against MEDAC’s resolution. (The bank is not facing the Meritas proposal.) Among other reasons, the board argues that shareholders can already voice their concerns about executive pay through the bank’s investor relations department, which it says is a much more effective way of communicating with the board compared with a simple vote.

Already, the Toronto-based collection of institutional investors known as the Canadian Coalition for Good Governance has said that it isn’t ready to demand a “say on pay.” (See page 34.) The CCGG has announced that it does not plan to support regulatory intervention to require an advisory vote on executive pay; nor will it automatically support shareholder resolutions calling for a vote. Essentially, the CCGG argues, ongoing improvements in corporate governance, pay practices and disclosure mean that it’s not necessary to require an advisory vote just yet.

The CCGG reports that at least 60 companies faced these kinds of resolutions in the U.S. in the past year. A few of them actually received majority support from shareholders. (The average level of support was an impressive 40%.)

However, the CCGG explains, its decision not to support mandatory advisory votes in Canada yet is guided by the fact that issuers are beginning to adopt majority voting for their boards voluntarily, which gives shareholders some ability to communicate their displeasure with a board.

The CCGG also believes that new executive compensation-disclosure requirements should both improve transparency around executive pay and enhance the link between pay and performance. It also points to signs that disclosure is actually improving and that compensation advisors are becoming increasingly independent.

That said, the CCGG notes that if the trend toward better governance and disclosure doesn’t continue, it may decide to support advisory votes in the future. The coalition will also continue to advocate fairer director elections, less elaborate pay packages and more insight into compensation schemes — including retirement benefits and change of control provisions.

A report from Toronto-based proxy advisory firm Institutional Shareholder Services Canada Corp. indicates that it will deal with advisory vote proposals on a case-by-case basis: “ISS Canada supports non-binding shareholder advisory votes on pay, in principle, as the ultimate vehicle for board accountability with regard to executive compensation.”

But that doesn’t necessarily mean the firm will recommend voting for such resolutions.

Late last year, the ISS gover-nance services unit issued updated policy positions for all of its markets. In Canada, the firm notes, it will evaluate advisory vote resolutions individually. Whether it decides to support an advisory vote resolution will depend on a number of factors, including “the company’s current compensation practices and disclosure,” a resolution’s “wording and intent” and the status of the new executive-compensation disclosure requirements.

Regulators decided to delay those requirements late last summer, but the expectation is that they will be in effect by this time next year. Until they are adopted, ISS Canada says, it believes it is “prudent to wait to firm up policy around this issue until these rules come into effect. In the meantime, ISS Canada will observe and learn from the U.S. experience as well as that of other global markets such as France and Spain as they deal with this issue.”

Of course, the possibility of advisory votes on pay isn’t the only issue likely to face the Big FIve banks in the upcoming proxy season. The SHARE database indicates — and National Bank’s circular confirms — that there is a range of issues being brought forward.

MEDAC is also proposing resolutions seeking gender equity on boards, more disclosure of banks’ hedge fund participation, cumulative voting policies and various other measures that deal with distributing the spoils earned by the banks, including higher dividends, increased employee pension contributions and limits on the exercising of executive options.
Bank of Montreal and Bank of Nova Scotia — disclose their procedures for evaluating credit risk associated with climate change.

And SHARE reports that well-known investor activist Robert Verdun has filed proposals with only one bank this year — CIBC — demanding that a large portion of executive pay be directed to charity; that past executive compensation plans be reviewed for regulatory compliance; and that the board give priority to director nominees that will best represent shareholders and not coddle executives.

It appears that executive compensation will be at the centre of many of the shareholder proposals faced by the Big Five banks this year, and possibly by other companies as well. IE