Stephen Jarislowsky, CEO of investment firm Jarislowsky Fraser Ltd., was recently interviewed by the Globe and Mail’s Report on Business. (See “Why Jarislowsky thinks stock options are dangerous.”) One of his key points has to do with the role of institutional investors in effecting positive governance change in Canada.
The way stock options are reported is a good example of the difference between regulatory change and effects of pressure from institutional shareholders, one that we at the Clarkson Centre have seen in our own research.
In 2008, there was a legal requirement, as part of the compensation disclosure rules, that each company disclose the value of option gains realized by each Named Executive Officer during the most recent fiscal year. But starting in 2009, the CSA reworked the compensation disclosure and removed the requirement to disclose Option Gains. As a result, since Option Gains disclosure is no longer required, only 16.6% of companies listed on the S&P/TSX Composite Index this year disclosed the value of option gains (and that number includes companies that had no options outstanding or no options exercised during the year so they were given credit by default as the options gains were obviously $0). So, where option gains disclosure was previously available for 100% of companies, it has fallen off dramatically with the removal of the regulatory requirement.
Conversely, the process for Director Elections in Canadian companies has been improving year-over-year despite the lack of a change in regulatory requirement. The current minimum requirement is that shareholders be allowed to vote “For” or “Withheld” for their board of directors. There are two problems with this. First is the fact that, since shareholders are not able to vote “Against”, then a director’s election is carried with even a single vote “For” (which hardly counts as a ringing endorsement). Secondly, many companies still use a ‘slate’ voting structure, under which shareholders can only vote “For” all or none of the directors. There is no option to vote “For” individual directors unless the company voluntarily chooses to hold elections in that way.
Since 2004, however, due in large part to the support of institutional investors such as the Ontario Teachers’ Pension Plan and the Canadian Coalition for Good Governance, more and more S&P/TSX Composite Index-listed companies are implementing a majority voting policy that not only allows shareholders to vote for individual directors but also counts votes “Withheld” as a vote against the director. In cases where a director receives less than 50% of votes cast “For”, that director must submit their resignation for the board’s consideration. In 2010, more than 50% of Index-listed companies in Canada have such a majority voting policy in place, and this is in large part due to institutional investors pushing for positive governance change, encouraging companies to do more than the bare minimum required.