By Thomas Watson
When it comes to publicity, Barrick Gold has seen better days. Not long ago, the world's largest gold producer was making headlines for merger talks with Colorado's Newmont Mining. A marriage of these two mining companies was billed as a great opportunity for all concerned, especially shareholders. But talks blew up and executive in-fighting ended up in the business press.
Barrick accused its former corporate fiancé of killing the proposed deal by failing to honour a term sheet signed by Barrick's incoming chairman John Thornton and Newmont chairman Vincent Calarco. The American company, on the other hand, blamed the failure to reach a deal on Thornton's personality, claiming the former Goldman Sachs executive was not a constructive negotiator. That led to negative headlines such as "Barrick Needs a Deal Maker, Not a Deal Breaker."
Thornton, of course, is one of the reasons that the Toronto miner failed to win investor support for its compensation plan last year, when 85.2 per cent of voting shareholders expressed disapproval of the company's pay practices -- including a controversial $11.9-million bonus handed to Thornton for simply signing on to replace Peter Munk, who bid farewell to shareholders as Barrick chairman this week.
Thornton's pay remains an issue for some major shareholders. But whether or not investors supported Barrick's latest compensation plan at the annual meeting on April 30, the company deserves credit for making significant changes to its governance structure and compensation programs (which were lauded by Institutional Shareholder Services, an influential proxy advisor) after receiving the strongest nay vote in Canadian say-on-pay history last year.
Barrick also deserves credit for allowing shareholders to officially voice their opinion on compensation matters in the first place. After all, as pointed out in a recentIvey Business Journal article by Ivey Assistant Professor Darren Henderson and Ivey grad David Fraser, Barrick has contributed to the say-on-pay movement by demonstrating why shareholder votes on compensation should be mandatory for all public companies.
Canada has fallen behind as the say-on-pay movement gained considerable momentum internationally in recent years. Following the introduction of the Dodd-Frank Act in 2011, all U.S. public companies were required to hold shareholder advisory votes on executive compensation. In Britain, which introduced the investing world to non-binding votes in 2003, compensation plans must now be approved by at least 50 per cent of shareholders. But that's not the case in Canada.
Thomson Corporation held the first Canadian say-on-pay vote in 2009 thanks to the company's acquisition of Reuters, which forced Thomson to follow UK rules. But other Canadian companies do not have to follow suit because our nation is one of the few developed countries that maintains a voluntary and non-binding say-on-pay system. Indeed, while about 60 per cent of Canada's 100 largest companies have adopted say-on-pay, the fact remains that less than 10 per cent of TSX-listed companies had adopted say-on-pay by mid-2013.
Furthermore, as research by Henderson and Fraser points out, companies that willingly adopt say-on-pay tend to rank higher in corporate governance rankings. As a result, because of voluntary adoption, shareholders who would probably benefit the most from an advisory vote on pay are typically not provided with the opportunity.
Opponents insist say-on-pay represents unwarranted micromanagement by shareholders who don't understand the complexity of executive pay arrangements or the need for boards to follow external professional guidance on pay matters. But Henderson and Fraser note there is little evidence to support these concerns. In fact, the results of most say-on-pay votes have been positive, with the 2012 average approval rating being over 90 per cent in Canada, the U.S. and the UK. Henderson and Fraser write: "Since all but the most egregious pay practices are typically approved, the concern of uneducated shareholder activism appears limited. Negative outcomes, however, still provide benchmarks for what practices are deemed as unacceptable by shareholders and therefore serve as a valuable deterrent for controversial pay practices, even when votes are non-binding."
Simply put, Henderson and Fraser argue say-on-pay serves as a valuable and low-cost way of enhancing management's accountability to shareholders. After all, without it, investors lack a specific mechanism to voice their opinions on executive pay packages, which for CEOs of the 100 largest companies in Canada averaged $7.7 million, or 169 times the average annual wage of $45,448 in 2011. But with it, as the Barrick experience shows, say-on-pay provides disgruntled investors the opportunity to influence management without expressing disapproval by selling their shares or by pursuing a more activist agenda.
And that's a win-win for all concerned, which is why all companies should be required to hold say-on-pay votes.
ABOUT THE AUTHOR: Thomas Watson is editor of the Ivey Business Journal published by Western University's Ivey Business School, where Watson also works with faculty on case studies and assists the Ian O. Ihnatowycz Institute for Leadership in raising awareness of best practices in management. As a freelance journalist, Watson contributes to Canada's leading business publications and writes a regular column for Financial Post Magazine. While working as a senior feature writer and columnist with Canadian Business from 2001 to 2011, he served on the editorial board credited with garnering the publication's Magazine of the Year nomination in 2009. Watson's investigative work at Canadian Business was also regularly recognized for excellence by the National Magazine Awards Foundation. In the corporate world, Watson has led practice groups at international marketing firms and headed investor relations for a global venture capital outfit. He can be reached at Watson@ivey.ca.