info suisse Summer 2015
Banking / Financial | Business Ethics
June 2015

Shareholder Awakening

(Beat Guldimann)
On the first Sunday of March 2013, the predictable became a reality in Switzerland as an angry mob of voters gave the so-called “Rip-Off Referendum” a decisive victory, with 68% of the voting population waving through a constitutional amendment that makes Swiss corporations laws the toughest and shareholders in Swiss public companies the strongest in the world.

And so, the Swiss now have corporate laws that require a shareholder vote on executive compensation, ban sign-on bonuses, golden parachutes and certain forms of profit sharing, and enforce all of the above with outrageous criminal sanctions.

Canada is not even close in adopting rules similar to the Swiss constitutional amendment, but this does not mean that shareholders in Canadian public companies are happy with the way that big corporate CEOs are being compensated.

Canada is no stranger to the view that inequality of compensation for an honest day’s work has increased significantly over the past few decades. With more C-suite executives taking home pay packages in the eight figures that any time before, it should come as no surprise that the greed of the few is met by the resentment of the many.

Jealousy and secret admiration have long turned into anger and outrage in an economy where corporations hoard profits and avoid creating jobs or shrink their workforce while rewarding the C-suite with outrageous bonuses even though little to no real economic value has been created.

A good number of Canadian publicly traded companies have recently introduced a consultative vote by shareholders (“Say on Pay”) on C-suite executive compensation. Many of the companies that were secretly hoping to wave through eight figure packages in their AGMs have been sorely disappointed. Canadian shareholders may not have the same legal status as their Swiss counterparts, but they have made their voices heard, loud and clear.

Canadian Imperial Bank of Commerce (CIBC) was the first one to ask shareholders for their opinion. in the aftermath of their announcement of inexplicable post-retirement padding of their long-departed CEO and Head of investment banking, shareholders decided to have none of the compensation policies and to send the CIBC Board back to the drawing board.

Similar votes happened at Barrick Gold’s AGM where a stunning 75% of shareholders voted against corporate compensation practices.

Air Canada’s Board should brace themselves for shareholders voting how they really feel when it is their time at the next AGM to comment on the airline’s CEO having gotten his pension doubled and a minimum price established on shares he received as part of his compensation packages over the years.

Getting to the right number to fairly compensate the Chief Executive of a publicly traded company is not an easy task. It has become an industry in and of itself in the past decade with a growing number of consulting firms competing for lucrative mandates to keep public Boards’ noses in the clear.

Regardless of all this, the question has to be asked is one of common sense as to why a public company CEO should be bringing home dozens of millions of dollars every year. And more importantly, why CEO pay has been going up significantly over the past years while wages, salaries and other forms of compensation of lower charges stayed flat or have been cut.

No matter how you look at it, CEOs are hired employees. The do not own or control the company, nor are they entrepreneurs. They have been hired by and serve at the pleasure of the Board of directors that is tasked to ensure that the company is managed appropriately to secure its success and create long-term value to those who carry the risk: the shareholders.

To illustrate risk: if a bad CEO runs a company in the ground, all they loose is their job and possibly their pension. Shareholders have to watch their capital melt away. Their loss is permanent while the fired CEO will in most cases find another job, just as long they didn’t steal the company silverware.

There is a delicate balance in finding what the fair value is of the work performed by a successful CEO but in most cases it seems excessive, if not ridiculous, to pay a “hired gun” a salary, performance incentives, cushy pensions, health benefits and other perks that amount to a number that most regular folk can’t even dream to be making in their lifetimes.

The compensation of the vast majority of CEOs in this country falls well within the category of fair value. There are only a few large companies listed on the Toronto Stock Exchange that seem to have lost their compass of reason. Their justification is that they need to keep in line with competition, which of course is a myopic way of looking at the problem. Doing something just because everybody else is does not right a wrong.

It is time that shareholders in Canada woke up and made their discontent about absurd levels of executive compensation heard. What happened at the AGMs of CIBC and Barrick is an encouraging sign. It is up to the institutional investors with their large blocks of shares in corporate Canada to keep up the momentum in the much needed change of direction.
SCCC Corporate Members
  • Zurich Canada
  • Laderach (Canada) Inc.
  • Custom Spring Corporate
  • Rolex Canada Ltd.
  • Lette LLP
  • Roche Canada
  • Swissmar Ltd.
  • Switzerland Tourism
  • Swiss Business Hub
  • Endress + Hauser Canada Ltd
  • Swiss International Air Lines Ltd.
  • Habib Canadian Bank  (Subsidiary of Habib Bank AG Zurich)