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© Copyright 2000 Rogers Media. The following article first appeared in the May 2001 edition of
BENEFITS CANADA magazine.
Fair pay
Institutional investors are weighing in with opinions on management compensation. Some executives
won't like what they have to say.
By Murray Gold
Institutional investors are increasingly frustrated by what they see as the extravagant compensation of
corporate management. Ultimately, it is the shareholders who foot the bill for management compensation. While
no one doubts that good management deserves to be fairly compensated, there is a growing apprehension that
current amalgams of salary, bonus and stock options are no longer fair to shareholders.
And so, it is not surprising that the Ontario Teachers' Pension Plan Board is taking on Nortel over the
telco's executive stock option plan.
In particular, Teachers' objects to stock option plans that would dilute a company's total outstanding
shares by more than 10%. This potential dilution weighs on a company's stock price, and may adversely
affect the rate of return that ordinary shareholders may expect.
Teachers' also objects to option terms of more than five years. Nortel's options have a life span of 10
years. Institutional investors are left to wonder whether management will realize significant profits from
options simply as a result of generic stock price inflation, or whether they will see a meaningful
relationship between management's contribution to stock price changes and its compensation.
Nortel is not alone. Rising share prices carried many boats through the 1990s, and shareholders may not
have complained about lofty management compensation packages when they themselves were earning high rates
of return. In the past year, however, management compensation levels, aided by generous bonuses and
reloaded stock options, have become detached from share price performance.
Against this background, it is not surprising that at least three shareholder rights claims have been
lodged against Nortel by and on behalf of investors that have lost enormous amounts of money holding the
company's stock. These actions, while legally separate from the executive compensation issue, are certainly
aggravated by investors' growing frustration that the fruits of corporate growth are going
disproportionately to management, while the companies' owners are left with losses.
Traditionally, most pension funds have remained on the sidelines of these debates. Now, however, as pension
plan members and individual investors become more and more adamant, pension funds will find themselves
under scrutiny if they do not address these issues more actively.
In particular, pension funds will need to take more active positions with respect to executive
compensation. They will have to satisfy themselves that compensation packages proposed by management are,
in fact, reasonable and justified. Where compensation packages are already in place, but are overly
generous, then pension fund shareholders will have to take steps to challenge those arrangements. Pension
funds will be driven to these positions not only by an emerging public concern, but also by the concerns of
their members and their fiduciary obligations to them.
Pension funds will also have to look more seriously at class action claims against management. Those claims
will serve at least two purposes. First, they will redress pension funds that have lost money as a result
of improper corporate practices. Equally important, however, these claims will give institutional investors
the clout they need to challenge corporate compensation practices.
While U.S. investors can pursue individual claims by way of a class action, Canadian legislation still
requires that each individual investor prove that he or she relied, to his or her detriment, on a
particular breach of a disclosure requirement. Since the circumstances of reliance are individual to each
investor, it is not an easy matter to consolidate all investor claims in a single class action. Canada's
securities laws need reform, and proposals have been made. It is now incumbent on institutional investors
to consider those reforms, and see that their rights are protected.
Murray Gold is a partner in the pension law section of Koskie Minsky in Toronto. mgold@koskieminsky.com.
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