Shareholder Control over Executive Compensation under Bill 101
Bill 101, An Act to Amend the Business Corporations Act (Bill 101), proposes a number of updates to the Ontario Business Corporations Act (OBCA). Introduced as a private member’s bill in early March, Bill 101 aims to shift power to shareholders through amendments in areas such as shareholder meetings, shareholder proxies, as well as the election and diversity requirements of directors. Among Bill 101’s most ambitious changes is to provide shareholders with power over executive compensation. These executive compensation amendments build on a trend in which many public companies are voluntarily providing shareholders with a “say-on-pay”. Bill 101’s proposal in this area, however, goes much further by providing shareholders with the unprecedented ability to both propose and approve executive remuneration policies. The implications of this power raises important questions regarding the respective responsibilities and duties of directors and shareholders.
Shareholders’ Current Say-On-Pay
Most Canadian business statutes, including the OBCA and the Canada Business Corporations Act, explicitly provide directors with the authority to fix compensation for directors, officers and employees, subject only to the company’s articles, by-laws and any unanimous shareholder agreement. Today in Canada there are no corporate or securities laws that provide shareholders with the ability to approve, much less propose, executive compensation.
While not legally required to do so, a trend in recent years has seen many publicly listed Canadian companies voluntarily provide shareholders with a vote on executive compensation. These say-on-pay motions are advisory only, with the results not binding the directors’ decisions. Although non-binding, the say-on-pay process is seen as providing shareholders with value by encouraging directors to consider and clearly explain compensation policies to shareholders.
While the voluntary adoption of non-binding advisory votes is steadily increasing, Canada lags behind certain other jurisdictions in both mandating say-on-pay votes and in providing teeth to the votes through binding outcomes (see a recent Timely Disclosure post). For example, the United Kingdom and Australia have mandated periodic shareholder votes on executive compensation policies.
A Radical Proposal on Proposals
Bill 101 proposes to not only provide shareholders with a binding vote on compensation policies, but to develop and propose what these policies are. While providing shareholders with the meaningful right to vote on compensation policies would be unprecedented in Canada, it is the second feature of the Bill 101 amendments – the right to develop and propose the compensation policy – that is truly radical.
The mechanism by which Bill 101 proposes to provide shareholders with power over executive compensation is as follows:
- Currently under OBCA section 99 (Proposal), a shareholder may submit a proposal to be circulated in the management information circular and considered at the annual shareholders’ meeting. Bill 101 would reduce the threshold of shares required to make a proposal from 5% to 3% of the shares or of the class or series of shares entitled to vote.
- A new section 169.1 would be added to the OBCA for the purpose of confirming that section 99 proposals may be made “to adopt an executive compensation policy with respect to the remuneration of directors or officers of the corporation or may make a proposal to amend or repeal such a policy.”
- Finally, Bill 101 would add to section 137 (Remuneration of Directors), a new subsection confirming that “directors of a corporation shall fix the remuneration… in accordance with any adopted executive compensation policy referred to in section 169.1.”
In short, the amendments would allow shareholders with 3% of a company’s shares to make a proposal regarding executive compensation that, if approved by the shareholders, would fix the company’s executive compensation policy.
Questions and Implications
As currently drafted, Bill 101 would have profound consequences for the framework of corporate governance in Ontario, and the role and responsibilities of directors and shareholders within this framework.
Directors have a duty to act in the best interests of the company. This duty includes developing compensation policies to attract and retain the talent necessary to effectively manage the company. By providing shareholders with the power to potentially usurp this responsibility, Bill 101 poses a challenge to directors’ abilities to carry-out their duties. While a majority of shareholders can be entrusted to vote in the best interests of the company, they do not have a duty to do so.
In addition, Bill 101 raises many further questions. For example, what level of prescriptive detail is expected to be provided in a proposed compensation policy? Are the proposals expected to provide specifics, such as exact remuneration numbers, or are they anticipated to be vaguer guidelines or caps on remuneration? While from a practical standpoint, what happens where an approved proposal contradicts an executive’s agreed upon terms of employment?
Will it Pass?
Perhaps the most important immediate question, though, is whether or not Bill 101’s executive compensation proposal will actually become law.
Bill 101 is a private member’s bill tabled by Harinder Takhar, a former minister under the current Liberal government. Mr. Takhar proposed similar amendments to the OBCA in October 2015 under Bill 128, An Act to amend the Business Corporations Act with respect to meetings of shareholders and the adoption of an executive compensation policy (Bill 128), which ultimately died in committee. Although Bill 101 has gone through second reading and has been referred to the Standing Committee on Finance and Economic Affairs, based on the fate of Bill 128 and the fact that Bill 101 is not Government sponsored legislation, its enactment in its current form is far from certain.
Given the uncertainty surrounding Bill 101’s details and fate, perhaps the only thing that is clear is the profound shift in Ontario corporate governance that will take place if it comes into force.