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Guest blogger Brenda Plant looks at shareholder engagement as a responsible investment strategy

Actu - Guest blogger Brenda Plant explains responsible investment

Responsible investment expert Brenda Plant (pictured) writes, "Did you know that the average of Canada's 100 highest earning CEOs makes in just four hours what the average Canadian makes in a year, around $46,000?*

Social inequality and especially income inequality are issues that concern me greatly. On the investment side, I am torn between two principles. Even if I want to get a return on my investment, I'm not prepared to do it all costs. 

My concern on this issue stems from a fundamental discomfort I feel towards injustice. Like many others, I also recognize that income inequality is not favorable to businesses or the entire financial system. In the area of finance, it is a systemic risk that involves the possible collapse of the financial system or entire market as a whole. The World Economic Forum rated "severe income disparity" as the fourth global risk of highest concern in 2014, and "structurally high unemployment/underemployment" as the second (Global Risks 2014). 

Responsible investment offers various ways to reduce income inequality and address the social repercussions. Responsible investors may attempt to address income disparity in one of two ways:

  • microfinance (at local or international levels), which I will discuss in a future blog post
  • shareholder engagement, which I will talk about today

Shareholder engagement is a responsible-investment strategy where investors use their influence and rights as shareholders to engage companies in dialogue, to submit shareholder resolutions, and to exercise their right to vote to improve governance as well as the social and environmental behaviour of the companies in which they hold shares. For more information, please visit the shareholder engagement section of the Ethiquette website.

Some funds and groups claiming responsible shareholder rights use their influence as shareholders to enter into dialogue with companies and ask them to disclose their CEO-to-worker pay ratios – the ratios between the salary of their CEO and the median pay of their employees. In general, listed companies don't collect or measure such data. Disclosure of pay ratios is a first step and will allow investors to assess whether the executive compensation is reasonable by adding context. Currently, the only other context provided is in comparison with other CEOs in the industry. 

In the United States, disclosures on pay ratios in voting material for shareholders of fast food companies revealed that CEOs earned 1000 times as much as employees in 2013. This was actually an improvement over the year before. In 2012, CEOs made 1200 times as much as the average fast food worker. (2) A responsible investor would perceive this disparity as a long-term risk, rather than as a short-term gain, and would encourage the company to explore the risks posed by such a gap. 

Switzerland has tried to cap executive pay to no more than 12 times as much as that of the lowest paid worker in the company. A referendum was held, but the measure did not pass. 

Still a small group with only a small influence, responsible investors in Canada have not made much progress on income inequality. The issue of the pay ratio between bank clerks and CEOs has been discussed at the country's five largest banks. Shareholder proposals to disclose information on these disparities were filed with the banks in 2012, 2013 and 2014. All the banks were asked to disclose this information, exposing the systemic nature of the risk and inciting the banks to take competitive action and do something even in the absence of action by their peers. The proposals were withdrawn when each bank agreed to weigh in on the questions being raised. Responsible investors will monitor how banks handle these issues and will take further action if the banks' measures prove inadequate.  

Pay-ratio disclosure emerged at a time when shareholders can finally comment on the executive compensation of companies in which they hold shares. In recent years, 80% of the companies included in the TSX-60 (60 large companies listed on the Toronto Stock Exchange) have adopted policies based on the practice of voting on executive compensation. "Say on pay" is the expression used in business law to mean that corporate shareholders have the right to vote on the compensation of senior management. Overall, at least 127 Canadian companies, most of them large, have adopted "say on pay" policies. A total of 120 votes have been held on the issue. (3) While these votes are voluntary and generally non-binding and do not involve a CEO-to-average worker pay comparison (which could soon be required by law in the United States and the UK) (4), they represent a step in the right direction. The problem remains that most investors are not yet responsible investors and are content to approve proposals from management inviting them to accept the suggested pay for CEOs. (5)

While this is a long process, responsible investors can actually have some influence on income disparity and have a duty to do so, not only from moral obligation, but because it makes sense as a long-term financial plan. Favorable changes would happen faster if a greater number of investors embraced responsible investment as a practice.

To learn more about how to invest in a world where we want to live, visit the Ethiquette Taking Action page and follow Ethiquette on Facebook and Twitter."

To be continued.

This blog post by guest blogger Brenda Plant was translated from French to English. 

Notes (French and English):
All in a Day's Work? CEO pay in Canada, Hugh Mackenzie, Canadian Centre for Policy Alternatives 
(2) www.demos.org/publication/fast-food-failure-how-ceo-worker-pay-disparity...
(3) www.mercer.ca/content/dam/mercer/attachments/north-america/canada/Perspe...
(4) The United States Securities and Exchange Commission may soon require public companies to disclose the compensation of their CEO and the median compensation of their employees, as well as the ratio between the two. The European Commission is proposing the adoption of regulations requiring certain publicly traded companies to disclose CEO-to-worker pay ratios. 
(5) http://www.socialfunds.com/news/article.cgi/article4047.html