A say-on-pay vote every three years is preferable to an annual vote that could lead to a focus on short-term objectives, according to the $100 million Ontario Teachers’ Pension Plan in its annual letter to more than 650 public companies around the world.
In the letter, OTTPP executives – chief investment officer Neil Petroff and senior vice president public equities Wayne Kozun – advocate for a sustained focus on key governance principles and discuss views on recent governance developments.
“Our concern with an annual advisory vote on compensation is that it may compel boards to adjust compensation programs every year to demonstrate that they are effectively managing the compensation process. We believe this approach could lead to a focus on short-term objectives rather than on more stable, long-term objectives, or lead to inconsistencies in the compensation program without a clear long-term focus. In our view, an advisory vote on compensation every three years would remove these biases and better facilitate the development of a compensation program focused on promoting the long-term success of the organisation.”
At the heart of this is the belief by the fund that the responsibility for a company’s corporate governance lies primarily with the board of directors.
In the letter, the fund outlines the key principles which it believes make a well-functioning board:
- boards must be comprised of independent-minded, competent directors
- the roles of chair and CEO are separated
- each director is elected annually by a majority vote of shareholders
“Let us be clear that we will still hold boards accountable for the compensation decisions made. We will continue to monitor (the) annual compensation decisions of our investments, examining whether the board alters the compensation program, uses discretion inappropriately or makes other compensation decisions that in our view are not consistent with a pay-for-performance regime or the creation of long-term shareholder value. In situations where these and other concerns arise, we will consider withholding our support for the election of the compensation committee chair or, in more serious situations, the entire compensation committee of the board.”
In addition to the frequency of advisory votes on compensation, the letter also outlines the fund’s views on pledging or hedging of executive-owned shares and stewardship codes, which are issues expected to attract increased attention in 2011.
The letter can be access here
