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Analysis of "Say on Pay" Resolutions: Advisory Shareholder Vote on Executive Compensation filed by Meritas Mutual Funds

Introduction

During the 2008 proxy season, Meritas Mutual Funds presented shareholder proposals (the "Proposal") seeking an advisory vote on executive compensation, so called "say on pay" proposals, to each of Canada's five major banks. The Proposal generally stated:

RESOLVED, that shareholders of [name of company] urge the board of directors to adopt a policy that
[name of company's] shareholders be given the opportunity at each annual meeting of shareholders to vote
on an advisory resolution, to be proposed by [name of company's] management, to ratify the compensation
of the Named Executive Officers set forth in the proxy statement. The proposal submitted to shareholders
should ensure that shareholders understand that the vote is non-binding and would not affect any
compensation paid or awarded to any Named Executive Officer

The proposals were brought forward with support from Shareholder Association for Research & Education ("SHARE") and received very strong shareholder support, ranging from approximately 35 percent to approximately 45 percent shareholder approval, as the results below show.

Company	AGM Date	Filer	Results
Canadian Imperial Bank of Commerce	February 28, 2008	Meritas Mutual Funds	44.96%
Bank of Nova Scotia	March 4, 2008	Meritas Mutual Funds	39.24%
Bank of Montreal	March 4, 2008	Meritas Mutual Funds	34.70%
Royal Bank of Canada	February 29, 2008	Meritas Mutual Funds	42.13%
Toronto Dominion Bank	April 3, 2008	Meritas Mutual Funds	41.50%

In its Q3 2008 Engagement Report, SHARE stated that they had engaged a total of 21 Canadian companies regarding the Proposal. SHARE also stated that they received responses from all but six of the 28 corporate governance leaders that they wrote to last quarter (Q2) regarding this issue. Throughout conversations with the five Canadian banks, it was communicated to SHARE that the banks would recommend that the shareholders vote against the Proposal for an advisory vote. However, Meritas has decided to re-file the Proposal at each of the five banks for the 2009 proxy season.

2009 Proxy Season

Despite the fact that the five Canadian banks recommended to shareholders in 2008 to vote against the Proposal for an advisory vote, Meritas has decided to continue to move forward with the Proposal for 2009. For the 2009 proxy season, Meritas has narrowed its focus with respect to its "say on pay" proposals and has presented the Proposal to the following companies:

Bank of Montreal
Bank of Nova Scotia
Bombardier Inc.
Canadian Imperial Bank of Commerce
Laurentian Bank of Canada
National Bank of Canada
Manulife Financial Inc.
Nortel Networks Corporation
Potash Corporation of Saskatchewan Inc.
Power Corporation
Royal Bank of Canada
Sun Life Financial Inc.
TMX Group Inc.
Toronto-Dominion Bank

The reason for the change of approach regarding focusing on thirteen (Nortel has filed for bankruptcy protection) Canadian companies as opposed to the original 28 (which was the focus for 2008) is unknown but it seems that a majority of the companies were not in favour of the Proposal. With the current global economic situation and the very public anger with executive compensation in the financial services area in the U.S., Meritas will be closely watching the responses on this particular issue in the U.S. to see if positive proposal results could gain some momentum and effect change in Canada. If there is an overwhelming support for the proposal in the U.S., Meritas and SHARE feel that it will send a strong message to publicly traded companies in Canada as well as to securities regulators. Meritas and SHARE believe that this smaller group will be a good indicator as to what will occur in the future.

In early 2009, upon communications with the staff of SHARE, it was revealed that all companies that received the revised Proposal have not indicated that they will not adopt the Proposal at their next annual general meeting. At the time of those conversations, according to the staff at SHARE, Meritas has stated that it is committed to pursuing this issue until it is either rejected outright or approved.

In early 2009, analyst and proxy adviser RiskMetrics Group ("RMG") laid out its policy updates for the 2009 proxy season. The revised guidelines will be in effect for shareholder meetings commencing on or after February 1, 2009 and they include changes specifically relating to the "say on pay." The policy on shareholder proposals looking for a "say on pay" was revised from its current "case by case" consideration, which meant that recommendations could go either "for" or "against" depending on the assessment of the company. For 2009, RMG will "generally" recommend in favour of the proposals. According to the update: "RMG supports non-binding shareholder advisory votes on pay in principle and views a shareholder advisory vote on compensation as the superior method for shareholders to register approval or disapproval of compensation arrangement." RMG also stated that proposals to give shareholders a binding vote on executive compensation will not receive their support. RMG does not believe that shareholders should micromanage compensation issues which the board should be responsible for.

As of today's date, shareholder meetings were held at the Canadian Imperial Bank of Canada (February 26, 2009), Royal Bank of Canada (February 26, 2009), National Bank of Canada (February 27, 2009), Bank of Montreal (March 3, 2009) and Bank of Nova Scotia (March 3, 2009) and the results have been overwhelmingly in favour of approving the Proposal and allowing for shareholders to vote on executive compensation.

Conclusion

2009 has shown us so far that shareholders are frustrated with the disconnect between executive pay and performance. As of today's date, it is clear that the pendulum has swung in favour of shareholders and they have now won the right to vote on executive pay. While slow to come to Canada, the remuneration issue has already taken hold elsewhere. Britain and Australia now require all public companies to hold advisory votes on executive compensation. Other countries - including Sweden, Norway and the Netherlands - have gone further, giving shareholders a binding vote on pay package designs. This could be a trend that will continue and the activist like Meritas and MEDAC will continue to push this issue until it becomes mandatory under securities regulation.