Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Sunday, October 21, 2012

Cotter et alia on Say on Pay

The First Year of 'Say on Pay' Under Dodd-Frank: An Empirical Analysis and Look Forward, by James F. Cotter, Wake Forest University Calloway School; Alan R. Palmiter, Wake Forest University - School of Law; and Randall S. Thomas, Vanderbilt University - Law School; European Corporate Governance Institute (ECGI), was recently posted on SSRN.  Here is the abstract:

In this article, we ask whether Dodd-Frank has made a difference in how shareholders vote on executive pay practices and whether the Act has changed the dynamic in shareholder-management relations in U.S. companies. Using voting data from the first year of “say on pay” votes under Dodd-Frank, we look at the patterns of shareholder voting in advisory votes on executive pay. Consistent with our expectations based on the more limited experience with “say on pay” voting before Dodd-Frank, shareholders in the first year under Dodd-Frank gave generally broad support to management pay packages.

Yet, during the first year under Dodd-Frank, not all pay packages received strong shareholder support. At some companies, management suffered the embarrassment of failed “say on pay” votes – that is, less than 50% of their company’s shareholders voted in favor of the proposal. In particular, we find that poorly-performing companies with high levels of “excess” executive pay, low total shareholder return, and negative voting recommendations from the third-party voting advisor Institutional Shareholder Services (ISS) experienced greater shareholder “against” votes than at other firms. ISS and other third party voting advisors appeared to have played a significant role in mobilizing shareholder opposition at these firms – and often a management response.

Although these votes are non-binding and corporate directors need not take action even if the proposal fails, most companies receiving negative ISS recommendations or experiencing low levels of “say on pay” support undertook additional communication with shareholders or made changes to their pay practices – reflecting a change in their interactions with shareholders. During 2012, the second year of “say on pay” under Dodd-Frank, we find similar patterns, with companies responding proactively when the company comes onto shareholders’ radar screens because of an unfavorable ISS recommendation or an earlier poor, or failed, “say on pay” vote in 2011. We use four case studies to illustrate this new dynamic.

In all, our findings suggest that the Dodd-Frank “say on pay” mandate has not broadly unleashed shareholder opposition to executive pay at U.S. companies, as some proponents had hoped for. Nonetheless, it has affected pay practices at outlier companies experiencing weak performance, high executive pay levels, which are identified by proxy advisory firms like ISS. In addition, mandatory “say on pay” seems to have led management to be more responsive to shareholder concerns about executive pay and perhaps toward corporate governance generally. This shift in management-shareholder relations may be the most important consequence of the Act thus far.

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