Say on Pay

One recent event is interesting for students of New Zealand governance.

The Canadian Coalition for Good Governance is a large investor group representing 49 funds with assets totalling more than C$1 trillion. It has argued recently that it does not want “say on pay” enacted into Canadian law. Legislation is already in force in Britain, Australia, the Netherlands, Sweden, Norway and Spain enabling shareholders to pass non-binding resolutions on board and executive remuneration, be it excessive or otherwise. Investors are pushing for the same laws in the US and Switzerland. Shareholder groups, especially in the United States, have been increasingly discomforted by large remuneration packages and exit packages paid to poorly performing CEOs and boards. The most recent examples have been seen with departures from large US financial institutions involved in the sub-prime credit market collapse.

The Canadian Coalition’s position is interesting therefore as it sees a shareholder group disputing the efficacy of “say on pay” regulation. Their preference is for constructive engagement with company boards whereby pay is clearly aligned with performance, where boards are committed to dialogue with shareholders and where directors are appointed or removed by majority voting of shareholders. The ability to confront boards with critical but non-binding resolutions which excoriate excessive remuneration for poor performance is not seen as a particularly functional governance mechanism. The passage of one such resolution at a recent Telstra Australia shareholders meeting dealing with the remuneration of CEO Sol Trujillo, and the Chairman’s response, is a case in point. Neither was particularly constructive. Denunciation is one thing; actually achieving a valid result can be something quite different.

In a real sense New Zealand is ahead of this issue. When a board or board committee sets director remuneration, it must be allowed to do so by the company’s constitution and the settings must be “fair” to the company. Remuneration of directors of listed companies requires shareholder authorisation. Best practice in New Zealand is for directors’ remuneration to be fair, reasonable and transparent. Majority voting of directors has been the longstanding rule. As far as CEO or executive remuneration is concerned, the Companies Act provides that shareholders must be given reasonable opportunity to discuss the management of a company at a shareholders meeting and this includes the passage of resolutions relating to the management of the company. These resolutions are non-binding unless the company’s constitution provides otherwise. Shareholders can also require the company to circulate shareholder proposals of matters to be discussed prior to a shareholders meeting. These proposals can include proposed resolutions.

Some companies have argued for a narrow definition of company “management” so as to limit the scope of shareholder discussion. This can be understood, but scarcely condoned, in the context of boards or chairmen who prefer a command and control approach to all or some of their shareholders. However, common sense and good governance dictate that CEO remuneration is clearly a matter of company management for boards and is therefore a proper topic of discussion at a shareholders’ meeting provided it occurs on an informed basis. Chairmen can rightly curtail generalised rants against executive greed. However rational discussion on remuneration against company performance and against industry and international settings can assist boards in their function of setting the remuneration of the CEO. Shareholders cannot perform this function. They do not direct or manage the company. A CEO is formally employed by the company and reports to the board, the company’s highest authority which is itself accountable to and appointed by the shareholders.

The defining relationship on this issue then is between the board and the company shareholders. This relationship can also be enhanced by transparent and informative board/shareholder engagement beyond an annual shareholders’ meeting. If it is limited only to annual shareholders’ meetings then the risk increases that criticism by shareholders through non-binding resolutions will be met by boards pulling down the shutters and refusing to engage. The relationship needs to be managed continuously. Boards need to listen carefully to the views of their shareholders and to respond effectively and transparently to material matters. Automatic acquiescence is not required but nor is obdurate refusal. One does not need to look far to find New Zealand examples of companies that engage effectively with shareholders nor to see companies that try to communicate and engage as little as possible.

The best companies and the best boards will always try to do the former.