Saturday, February 22, 2014
Stock options, the once-revered and now beleaguered compensation tool, face a challenge in Canada this spring.
A Montreal-based shareholder group, Le Mouvement d’éducation et de défense des actionnaires, or MÉDAC, has placed shareholder proposals on the proxy circulars of seven companies, including Canada’s big five banks, calling on them to “gradually eliminate” the use of stock options in their compensation plans.
MÉDAC, an organization that has placed many governance-oriented proposals on proxies over the years, argues that executive compensation should be based on performance criteria that the executive can actually control — and stock price is not one of those things.
MÉDAC cites an academic paper by Michel Magnan of Concordia University and Sylvie St.-Onge of HEC Montreal arguing that 90 per cent of the stock-price changes at the big five Canadian banks were due to attributes of the banking sector as a whole, such as the economy and interest rates. Only 10 per cent of the changes were the result of factors specific to each bank – and CEO performance was just one ingredient.
Companies embraced options a generation ago as a way to link executive pay to performance. Options programs proliferated during the markets’ long winning run in the 1980s and 1990s. The end of that boom, in 2000, helped expose their flaws. Executives who had accumulated, and then used, many years’ worth of stock options retained their wealth even as their long-term investors suffered.
Options continue to allow lacklustre executives to benefit from the rising-tides-lifts-all-boats phenomenon. Stock options reward the holder for a rising share price, even if the shares are performing no better, or even worse, than the market.
Consider a company that awards its CEO 200,000 stock options when the shares trade at $50 apiece. Over the next five years, the company’s shares appreciate by 5 per cent each year — but the market gains an average of 8 per cent. The company’s shareholders would have been better off investing in an index fund. The stock options, though, are worth $2.8 million.
Many companies, awakening to these problems, have been shifting away from their use over the past several years. MÉDAC president Daniel Thouin says his group chose seven companies that already seem to be reducing their option awards for its proxy initiative this year.
Royal Bank of Canada, whose AGM is Wednesday, is the first of the big banks to face MÉDAC’s proposal. In its response, RBC notes that it has been reducing the proportion of options in the equity portion of its executive compensation packages, from 40 per cent in 2010, to 25 per cent in 2011 and 20 per cent in 2012. “These changes were aligned with a broad market trend to reduce stock options and overall compensation program leverage,” RBC says.
The response, attributed to the company’s board, says its compensation committee believes stock options that are “duly approved by shareholders, modestly dilutive and properly structured, provide alignment between management compensation and the creation of shareholder value.”
Stock options can be designed differently. A few companies, for instance, allow stock options to vest only if certain operating criteria are met. One U.S. company, Level 3 Communications, has an “outperform stock option” program, in which the company’s shares have to beat the Standard & Poor’s 500 index before the stock options have value. (There’s a catch, however: The options can be worth as much as four times as much as a normal option, depending on how much Level 3 outpaces the S&P 500.)
Another corporate-governance group, the Shareholder Association for Research and Education, or SHARE, is endorsing MÉDAC’s proposal, noting that Royal Bank and others already use performance-based vesting for restricted stock in its compensation program. (Unlike stock options, restricted stock is given to executives but “vests,” or becomes sellable, only over time or if other criteria are met.)
“With Royal Bank’s stock options, there’s no basis in performance at all, for the awards or vesting,” says Catherine Smith, SHARE’s senior research analyst. “So the question is, what behaviour do you want to motivate with those stock-option awards? And the way the Royal Bank is doing it, all you’re motivating is for them to stick around. It’s a reward for not quitting.”
Many of the banks’ performance-share programs still award some portion of the stock, worth hundreds of thousands of dollars or even millions, if the bank’s performance trails peers.
For example: RBC executives can still get 100 per cent of the target performance share award even if the stock’s total shareholder return is as low as the 40th percentile of a peer group. (The 50th percentile is average.) They can only get a zero award if the shares are in the 20th percentile or lower, and the bank’s three-year average return on equity is below 10 per cent, a number RBC routinely achieves.
Much of the grousing about executive pay seems to come from governance scolds and ordinary citizens. Shareholders, given a chance to rebel, have not. Of the S&P/TSX 60 Index companies that conducted a “say on pay” vote in 2013, the median approval rate for the compensation plans was a robust 94 per cent.
MÉDAC also placed its option proposal on the proxies at Cogeco Inc. and Metro Inc., which conducted their annual meetings in January. The proposal got 0.3 per cent of the vote at Cogeco and 5.1 per cent of the vote at Metro, according to SHARE’s database of shareholder votes.
“We have to start somewhere, and with this proposal, it’s probably the best way to begin to change the way [CEOs are compensated],” says MÉDAC’s Mr. Thouin. “Stock options are the least justified part of compensation.”
Posted by Brent Fullard at 9:26 AM
Friday, February 14, 2014
Audacious is the word to describe the contents of Harper's so called Fair Elections Act, the purpose of which is to confer advantages on the Conservatives through increased campaign donation levels, as if more money thrown at politicians will fix what is fundamentally wrong with our electoral system?
Devious is the word to describe the purpose of Harper's little income splitting spat with members of his party, as the real purpose is to divert Canadians' attention away from the contents of Harper's Fair Election Act that is presently being rammed through Parliament. Whether that was the intended effect of the income splitting spat or not, it is certainly serving that end purpose.
At least Elizabeth May is not so easily diverted. Here is what she had to say about the Fair Elections Act in Parliament on Tuesday:
Fair Elections Act (Bill C-23)
When I look at what we need in Canada to fix democracy, I remember a clever little ad put together by Fair Vote Canada. Don Ferguson of Royal Canadian Air Farce, one of my favourite icons of Canadian comedy, starred in it. He wore a white lab coat and started talking about the serious tragedy of electoral dysfunction in Canada, the failure to perform well when it came to elections.
I will not go down the double entendres that went through that Fair Vote Canada ad, but as members can imagine there were many of them. However, it did bring to mind the need for a prescription to fix an unhealthy system. The ad pointed to the issue of getting rid of first past the post, which is fundamental to fair elections in Canada, and having election results which are then mirrored in the composition of our house of commons.
We need reform. We need a fair elections act. We need to deal with the unhealthy level of hyper-partisanship, the non-stop attack ads, and the fact that we have not gotten to the bottom of the robocall scandal of the last election. However, this bill is not it.
A real prescription for a healthy democracy is in our grasp and instead we get this bill that would weaken our electoral system, weaken democracy, and further reduce voter turnout. We had an opportunity to sideline the cynical politics of non-stop attack ads that function as a “deliberate mechanism,” which is the language used by political spin doctors, of voter suppression. The goal of non-stop negative advertising is to reduce voter turnout in the interests of another party.
A lot of things now pass for political prowess, for which anyone who loves democracy should hang their head in shame and be condemned from ever standing for election again. This is not about every party getting out and urging everyone to vote, as we have heard people from across the aisle say all day. Over and over again, we have examples of efforts to do exactly the opposite. I am afraid this bill is in that spirit of reducing voter turnout.
We could have, with this bill, pursued the reforms found in private member’s Bill C-559, put forward by the hon. member for Wellington—Halton Hills. That would have led to fairer elections. We could have levelled the playing field for financing so that members of Parliament who come to this place as independents have a fair chance to raise the funds they need to run for re-election. However, we did not.
The ways in which this bill would reduce the potential for a healthy democracy and worsen voter turnout need to be reviewed. Many of my colleagues in this place have given very eloquent, articulate, and full reviews. In particular, I have to give credit and homage to my friend, the hon. member for Toronto—Danforth, whose work on this bill was brilliant.
Let me point out what I would agree with. I may be a minority on this matter, but I do not really think it is a problem to create a commissioner for elections who operates out of the office of public prosecutions. I see that as an independent place. The problem is the government has not given that office any tools. It has not given that officer subpoena powers. What is worse is, for some reason, it has created a “black box” surrounding the work. It would amend the Access to Information Act to remove, from access to information, anything going on in the work of the commissioner for Canada’s elections. They would also remove in the Elections Act the requirement to give any information about investigations.
What I also would agree with in this bill is the scheme to deal with the robocalls, to have a way of tracking who buys this kind of automated calling service. That is not bad. I would have voted for that.
However, the bill also includes a big new loophole for the spending of money. It now will not be considered an elections expense to spend money on activities that are considered fundraising for nomination candidates. That is an open door to abuse.
What is the worst part of this bill? This cuts to the core of democracy. This is a charter issue. I turn to a most recent statement by the Supreme Court of Canada on the right of Canadians to vote. It was a decision of October 2012. We are all familiar with it. It is in the name of the current member for Etobicoke Centre, so I will not say the name of the case. However, it was a strong decision written by Mr. Justice Rothstein and Mr. Justice Moldaver.
They had this to say:
The right of every citizen to vote, guaranteed by s. 3 of the Charter, lies at the heart of Canadian democracy.In this instance, they did not find that those rights had been trampled upon, but that was because a lot of the provisions this bill would remove were in place. Therefore, I think this quote from the Supreme Court is timely and informs us, as my friend, the member for Victoria, recently pointed out, that this bill is probably unconstitutional. The following is what the Supreme Court had to say at the bottom of page 98 of the decision:
Our system strives to treat candidates and voters fairly, both in the conduct of elections and in the resolution of election failures. As we have discussed, the Act seeks to enfranchise all entitled persons,…
A voter can establish Canadian citizenship verbally, by oath.That cannot happen any more, not with this bill.
The court went on to say:
The goal of accessibility can only be achieved if we are prepared to accept some degree of uncertainty that all who voted were entitled to do so.The Conservative members of the House and the minister have utterly failed to provide any evidentiary background for the notion that we have a crisis of voter fraud in this country. There is no evidence for the notion that Canadians are covering themselves up through creating false IDs and voting more than once. The crisis in Canadian democracy is not that Canadians are voting more than once, it is that they are voting less than once, and this bill would worsen Canadians’ trust in the system and increase cynicism.
As for the treatment of the Chief Electoral Officer, talk about sharper teeth: they are all sharpened in the direction of going after Marc Mayrand. I find this shocking. He is a public servant, he is doing his job, and the job that was being done is now essentially going to be stifled.
When I worked on my last book, which was on the crisis in Canadian democracy ironically, I wanted to try to get to the bottom of why young people were not voting. Where could I find good research that informed that discussion? I found that good research because it was commissioned by Elections Canada. It started to inform political parties what we should do to ensure civic literacy and political understanding from the earliest possible moment.
I think it undermines political responsibility and civic understanding to refer to voters as customers. There is something fundamentally wrong with an Elections Act that talks about customer service when we are talking about voting. It is a right. It is not shopping, and every Canadian must be allowed to vote.
I cannot tell members how heartbreaking it is to hear from people, particularly young people, who have been turned away at the polls because they found that multiple forms of ID did not work. I remember hearing from a young woman in Dawson City when I was holding a town hall there on democracy. She said that she had tried twice. I asked her if she would keep trying and she said she did not know if there was any point, that they did not want her to vote.
I remember the tears in the eyes of an older man in Pictou County who had voted in his polling station during his 75 years until these new changes were brought in by the current administration and he was denied the right to vote because he could not produce a photo ID. He did not have a driver’s licence. His sister in law was working at the polling station, but under the rules she was not allowed to vouch for him because she had not gone there for that purpose. Under this new act, we would see more and more Canadians turned away, disenfranchised by the false notion that we have a crisis in voter fraud. That is not our crisis.
We need to do everything possible to restore faith among the Canadian public in the health of our democratic system, and this bill takes us in the absolute wrong direction. Why would a governing party do this? Why is there such a rush to disenfranchise Canadians? Is there an election coming right away that we do not know about? Do we have to have all these new rules in place for first nations, seniors, young people, the poor, and the groups that advocate for those parts of our society that are more disenfranchised by having to produce government-issued photo IDs? Is that the point?
I am baffled and appalled and deeply shocked and troubled by this bill. The things in it that are good could have been so much better, but the things that are bad are unforgivable in a democracy.
Posted by Brent Fullard at 8:19 AM
Thursday, February 13, 2014
On the issue of income splitting, today we learn that Finance Minister Jim Flaherty wants to take "a long, hard analytical look … to see who it affects in this society and to what degree",
Funny that Flaherty didn't take a " long, hard analytical look … to see who it affects in this society and to what degree" when he killed income trusts back in 2006, after being elected six months previously on a platform of "preserve income trusts by not imposing any new taxes on them". Instead Flaherty destroyed an essential retirement income savings vehicle for the 75% of Canadians without a workplace pension and by CAVING to the interests of CEOs and lobbyists for the life insurance industry who were served by killing income trusts for their own narrow interests. Meanwhile Flaherty promoted his patent lie that "income trusts cause tax leakage", which all reputable analysts have proven to be false (Royal Bank, BMO, Pricewaterhouse Coopers, HLB Decision Economics, etc.) Instead Flaherty's reckless and hasty decision lead to a wave of foreign takeovers of Canadian businesses formed as trusts (eg Prime West Energy trust taken over by Abu Dhabi Energy) amounting to over $100 billion in takeovers that created REAL TAX LEAKAGE, to the tune of $1.2 billion a year. To learn more about Flaherty's gross incompetence click on this article by Professor Stanbury entitled "Leadership? Here’s Ten Reasons Why the Tax on Income Trusts Was a Public Policy “Train Wreck”
Posted by Brent Fullard at 10:21 AM
Tuesday, February 4, 2014
Irrespective of which party might benefit from such a change, money should have no role to play in a democracy or in effecting the outcome of an election. Democracies are based on the principle of one person, one vote and not the principle of the person with more money to spend having a greater impact on an election's outcome than the person with less money to spend.
Harper's insidious move to increase the permissible level of donations is nothing less than changing Canada's democracy into a pay-to-play democracy, which is a very bad thing, no matter how you look at it.
Details of the highly anticipated bill, however, seem to have already been leaked to two prominent Ottawa-reporters.
According to one, the new legislation will overhaul Elections Canada. Specifically, it will change how investigations are launched by the electoral watchdog.
"[The new bill] will rein in the power of the Chief Electoral Officer when it comes to launching investigations into violations of electoral law; and will end the practice of “vouching” for voters who don’t have proof of identification at the ballot box, according to sources who have seen the draft bill," the National Post's John Ivison wrote.
"The new bill will propose to remove the decision on whether investigations should be launched from the office of the Chief Electoral Officer, Marc Mayrand, and hand it to a new panel independent of the government and Elections Canada."
The Post and the Globe and Mail are also reporting that the political contribution limit — the amount of money an individual can donate to a federal political party in a given year — will increase from the current $1,200.
An independent democracy watchdog says raising the donor limit is a mistake.
"Raising the limit on donations is the most dangerously undemocratic and unethical change that the government could make," Duff Conacher of Democracy Watch told Yahoo Canada News.
"The limit is already much higher than an average voter can afford, and raising the limit will only allow wealthy people to buy more influence than they already can, and it will also lead to more corruption like happened in Quebec because it will make it easier for businesses and other organizations to funnel large donations to the parties through their executives and employees."
[ Related: Elections Canada chief in dark about election reform bill ]
The Tories originally promised a new Elections Act in 2012 during the height of the robocall scandal where voters in several ridings across the country alleged that they were misdirected to non-existent voting booths.
The opposition parties, however, are little weary of the Tories reforming the act that governs an institution with whom they've had a rocky relationship.
The Conservatives have battled the watchdog for years about the 'in and out' affair, the national ad buy loophole which the Tories finally plead guilty to in 2011. They've also called-out Elections Canada for not aggressively going after Liberal and NDP leadership candidates who still haven't paid back their debts.
"It's ominous ... given their track record with Elections Canada, which has been confrontational right from Day 1, and then resentful. It now may have moved to vindictive," deputy Liberal leader Ralph Goodale told the Canadian Press.
"It's significant that they've prepared this [bill] without any serious discussion with anyone at Elections Canada. I think everyone would be well advised to read the fine print with a great deal of care."
Posted by Brent Fullard at 6:54 PM