Canada’s good governance hypocrites

CORPORATE governance advocates around the world were stunned earlier this month when a powerful group of Canadian institutional investors said it would not support a say-on-pay regime for the country’s corporations.

The announcement by the Canadian Coalition for Good Governance (CCGG), which represents 49 of Canada’s leading institutional investors with over $1 trillion in assets, prompted national business columnist Madelaine Drohan to accuse them of “dropping the ball.”

One international corporate governance commentator referred to the move as “a bit odd.” And the announcement even made news in the US, which typically pays little attention to what happens in Canada.

Then again, when last did you hear a shareholder group say they don’t want additional rights? That’s as newsworthy as Man Bites Dog.

Highest fund management fees in the world and no say for shareholders

But no one should have been surprised because Canada’s clubby investment fund industry is hardly the epitome of good governance. Canada has weak protections for shareholders of mutual funds and some of the highest management fees in the world.

If the CCGG went out and backed a move for a legislated advisory or binding vote on pay at Canadian public corporations it would have been, for its mutual fund members at least, akin to the pot calling the kettle black.

Unlike in the US, mutual funds in Canada are not required to have independent boards of directors. Instead, they appoint so-called Independent Review Committees (IRCs) that have the narrow role of reviewing conflicts of interest.

However, the IRCs have no teeth and no control over the biggest conflict of interest of them all — the management agreement between the fund and the fund manager, including the fees the manager receives for managing the fund.

According to a study of international mutual fund fees by academics at the Georgia Institute of Technology, the London Business School and Harvard Business School, Canada has the highest management fees by far for mutual funds out of 18 countries studied. Part of the reason for this, as some have argued, is that management fees at mutual funds are not negotiated at arm’s length.

The Canadian mutual fund industry, including some members of the CCGG, have taken the view that if investors don’t like the fee structure, they can do the traditional Wall Street Walk and sell the fund.

But that’s a hypocritical position for the mutual fund members of the CCGG to take. On the one hand they advocate engaging with corporate Canada on governance issues, but on the other they deny their own investors the same thing.

Another interesting fact it that while 70% of Canada’s mutual funds are set up as trusts, the remainder have a corporate structure. In the past two years, more than half of new funds have chosen the corporate structure with a board of directors.

Were regulators in Canada to follow the lead of their Commonwealth counterparts in the UK, Australia and New Zealand and require an advisory vote on executive pay at corporations, the door conceivably would be opened to shareholders of mutual funds with a corporate structure being given an advisory vote on management fees.

I find it hard to imagine the CCGG members sitting around the table to talk about say-on-pay and not one of them having a vision of little mom and pop voting on their management fees. How intolerable!

Argument runs counter to fiduciary common sense

Finally, it is worth pointing out that the CCGG has not said it is opposed to say-on-pay on a case-by-case basis. Several of its members, including its mutual fund members, have recently voted in favor of numerous say-on-pay proposals at US companies.

TD Asset Management, for example, voted in favor of such proposals at United Technologies, Wells Fargo, Wyeth, Merrill Lynch, Apple Inc., Time Warner, Home Depot, United Health Group and Wal-Mart. Similarly, fellow CCGG member McLean Budden supported say-on-pay proposals at Wells Fargo, Wyeth, Valero Energy, AT&T, Verizon and Motorola. Other CCGG members have also voted for say-on-pay proposals.

However, these funds, through their participation in the CCGG, are now saying they “will not support any regulatory changes or recommend universal backing for resolutions that will introduce mandatory advisory shareholder votes on executive compensation.” (emphasis added.)

Unfortunately, their position runs counter to fiduciary common sense. Instead of having a say-on-pay tool to wield at all public companies, the CCGG members would rather expend time, resources, and the money of their investors to get into multi-year proxy battles with unyielding corporate boards that are lavishing shareholder money on their executives for no good reason.

A lot of time and money could be saved if the government just made say-on-pay mandatory for all companies, but the CCGG does not want this. And their explanations for why they don’t want it make little sense.

As “good governance” advocates, the CCGG now looks to be on shaky ground. With their very public stand against say-on-pay they may have shot their own credibility in the foot and shone a very bright spotlight on themselves.

People like me, who previously took them at face value, are taking a more critical second look. And what we see is that their kitchen vessels are not all burnished and bright.

(Thanks to Gordon, whose late Friday email asking if I’d seen this story put me up to writing this piece.)

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