Dodd-Frank's Say on Pay: Will It Lead to a Greater Role for Shareholders in Corporate Governance?

Abstract

"Say on pay" gives shareholders an advisory vote on a company's pay practices for its top executives. Beginning in 2011, Dodd-Frank mandated such votes at public companies. The first year of "say on pay" under the new legislation may have changed the dialogue and give-and-take in the shareholder-management relationship at some companies, particularly on the question of executive pay. We study the evolution of shareholder voting on "say on pay" - beginning in 2006 as a fledgling shareholder movement to get "say on pay" on the corporate ballot, evolving as a handful of companies and later the financial firms receiving TARP funds conducted "say on pay" votes, and leading to Dodd-Frank’s extension of the process to all public companies. Using results from an empirical analysis of data from the pre-Dodd-Frank period, we project that the new mandatory management-sponsored "say on pay" proposals will attract strong shareholder support at most companies, while poorly performing companies with high pay levels can expect shareholder dissent. These projections are confirmed by early results in the first year of post-Dodd-Frank experience with "say on pay". Our empirical analysis of the pre-Dodd-Frank data supports the potential importance of third party voting advisor recommendations, particularly by the ISS, on executive pay proposals. The raw data show 20 percent swing in shareholder support for management "say on pay" proposals associated with a negative ISS recommendation. However, once we take into account the different recommendations issued by management and ISS, the net effect of an ISS negative recommendation on the overall shareholder vote is relatively small at most companies. Nevertheless, the early Dodd-Frank results show that all 37 companies that failed to obtain majority support in these advisory votes had received negative ISS recommendations. The early results show that companies that initially received negative "say on pay" recommendations by the ISS often modified their disclosure filings or changed their pay practices. This may indicate a growing role for shareholders in influencing executive pay practices and corporate governance more generally.