TABLE OF CONTENTS INTRODUCTION I. DESCRIPTION OF THE SAY ON PAY REGIMES: LEGAL RULES AND VOTING OUTCOMES A. Say on Pay in the U.S. 1. Development 2. Dodd-Frank Requirements 3. Impact of Say on Pay B. U.K. Say on Pay 1. Early Legislation 2. The Effects of Nonbinding Say on Pay in the U.K. 3. New Legislation Implementing Binding Say on Pay C. Say on Pay in Australia 1. Overview 2. Say on Pay: The Two-Strike Rule 3. Initial (Mixed) Reactions to the Two-Strike Rule D. Belgium 1. Regulatory Framework for Shareholder Approval of Executive Remuneration Arrangements 2. Assessment of Shareholder Voting Power on Executive Remuneration Agreements in Belgium E. France 1. Regulatory Framework for Shareholder Approval of Executive Remuneration Arrangements 2. Assessment of Shareholder Voting Power on Executive Remuneration Agreements in France a. Voting on Total Board Pay b. Strength of Shareholder Voting on Other Elements of Executive Pay F. Germany 1. Regulatory Framework for Shareholder Approval of Executive Remuneration Arrangements a. The Two-Tier Board Structure b. Shareholder Approval Requirements for Executive Remuneration 2. Assessment of Shareholder Voting Power on Executive Remuneration Agreements in Germany a. Executive Remuneration in Germany b. Results of Shareholder Voting on Executive Remuneration G. Sweden 1. Regulatory Framework for Shareholder Approval of Executive Remuneration Agreements 2. Assessment of "Say on Pay" in Sweden H. The Netherlands 1. Regulatory Framework of the Dutch Board Structure and Remuneration Arrangements a. The Two-Tier Board Structure b. The One-Tier Board Structure 2. Executive Remuneration 3. Assessment of Say on Pay I. Summary of Countries' Different Features II. WHY IS SAY ON PAY BEING ADOPTED? A. Diverse Versus Concentrated Ownership Patterns B. The Effects on Executive Compensation of Increased Stock Ownership by Institutional Investors C. Social Intolerance of Income Inequality D. Political Party Enacting the Legislation E. State Ownership of Major Enterprises III. PREDICTIONS ABOUT THE FUTURE OF SAY ON PAY INTRODUCTION
Shareholders have long complained that top executives are overpaid by corporate boards irrespective of their performance. (1) Traditionally largely powerless to prevent these perceived abuses, investors have sought a way to gain greater influence over directors' compensation decisions. While many governments responded by increasing the level of corporate disclosures on compensation packages and policies, and occasionally tinkering with tax policies in efforts to reduce pay levels, none of these changes has had much impact. (2)
However, investors have continued to put pressure on governments to change the status quo. In 2002, these efforts led the U.K. to adopt legislation requiring public companies to permit their shareholders to have a mandatory, nonbinding vote on the compensation of their top executives ("Say on Pay"). (3) Since that time, there has been a wave of Say on Pay legislation enacted in countries around the world, including the U.S., Australia, Belgium, the Netherlands, and Sweden, with Swiss voters most recently approving a binding shareholder vote on executive remuneration. (4) In this Article, we examine these new legislative iniatives carefully and ask why they have been so widely adopted, how effective they are, and whether they are likely to be adopted in other countries. (5)
What is the justification for adopting these rules? The answer to this question turns in large part on the prevailing share ownership structure of corporations in the country in question. For countries where most corporations have dispersed ownership structures, like the U.S., the U.K. and Australia, proponents have claimed that these votes will allow shareholders to monitor management and thereby reduce the agency costs of the separation of ownership and control in public companies. (6) Advocates argued that institutional investors, assisted by third-party voting advisors, would overcome collective action problems, inform themselves about corporate performance and intelligently evaluate the executive pay packages being proposed by corporate boards. Boards would, in turn, respond by better engaging with their investors and providing them with more information, tie executive pay more closely to performance and show greater restraint in the compensation awards. (7) Opponents of Say on Pay denied that any of these possible benefits would result and instead claimed that the entire effort was misplaced. (8)
In concentrated ownership countries, (9) such as the Netherlands, Germany, Sweden, and Belgium, the story is more nuanced. The existence of controlling shareholders at most companies in these countries means that there already is close monitoring of executive pay levels by a motivated owner. (10) Thus, at first blush, there seems to be little reason for these countries to have adopted Say on Pay voting requirements. However, on closer examination, we find several other reasons for these changes, including: increased ownership dispersion at larger public companies creating a need for a new monitor of executive pay; strong support of such legislation by foreign institutional investors whose ownership interests in EU-based firms has increased dramatically in recent years; social pressures against rising levels of income inequality; political responses by left-leaning parties to these social pressures by the introduction of Say on Pay legislation; and the presence of important state-owned enterprises in some of these countries that give politicians an important role in setting executive pay.
The effects of Say on Pay votes are harder to summarize because they vary across nations. However, several general statements can be made. First, when Say on Pay votes are held, shareholders vote to approve the pay levels, pay composition, and pay policies, at almost all companies by very wide margins. Second, third-party voting advisors, such as Institutional Shareholder Services ("ISS"), pay a crucial role in informing institutional investors about executive compensation practices and packages. These advisors' recommendations for, or against, a company's pay plan may also carry significant weight with their institutional clients, and can dramatically impact the outcome of a vote. Third, Say on Pay's strongest effect has been felt at companies that exhibit poor performance with relatively high levels of pay. (11) Fourth, when companies receive low levels of shareholder support in a vote, directors frequently contact their investors to better explain their policies, thereby giving shareholders greater input into pay issues. Fifth, Say on Pay votes appear to have had little long-term impact on executive pay levels, while research on their impact on shareholder value tends to show a small positive impact, although some studies find no, or negative, effects.
Overall, we conclude that Say on Pay is here to stay. In fact, if the recent experience of the Swiss popular referendum in favor of a binding vote on executive compensation is any gauge, then it seems likely to appear in more countries over time. Thus, in the final Part of this Article, we look at the future of Say on Pay. We hypothesize that if boards continue to increase pay levels over time, then countries with advisory votes will move to make them binding votes. This already has been the case in the U.K. and Australia. Moreover, some legislatures will feel it necessary to impose hard-law regulations on compensation practices, either directly on pay levels and composition as the EU already did and is further threatening to do for banks, (12) or indirectly as the Australians have done by attaching severe consequences to boards' failure to respond to repeated high levels of shareholder dissent in Say on Pay votes. (13)
This Article proceeds as follows. In Part I, we provide an overview of the current state of Say on Pay in the U.S., U.K., Australia, Belgium, France, Germany, Sweden and the Netherlands. Part II distills the experiences of these nations to develop a set of explanatory factors for why Say on Pay legislation has been adopted, or seems likely to be adopted, in these countries. The final Part of this Article contains our predictions about the future of Say on Pay in these and other countries.
DESCRIPTION OF THE SAY ON PAY REGIMES: LEGAL RULES AND VOTING OUTCOMES
While Say on Pay has been the topic of several empirical studies at both the national and international level, many of these papers do not clearly define Say on Pay. This is important because different kinds of shareholder votes coexist and it is a serious mistake to treat them all as equivalent. (14) In our study, we define Say on Pay as: (1) a recurring, mandatory, (15) (2) binding or advisory shareholders' vote, (3) provided by law, (16) that (4) directly or indirectly through the approval of the remuneration system, remuneration report or remuneration policy, (5) governs the individual or collective global remuneration package of the executives or managing directors of the corporation. (17) As we will see, not all countries that permit shareholder votes on executive remuneration issues provide those investors with a Say on Pay vote.
We begin with a detailed discussion of the Say on Pay regimes adopted, or proposed, in eight of the most important industrialized countries in the world: the U.S., the U.K., Australia, Belgium, France, Germany, Sweden and the Netherlands. While there has been some research conducted in the first three countries mentioned, almost nothing has been written about the experiences of the Continental European countries. (18) As a result, much of the statistical evidence that we report on these five countries is derived from data that we have hand collected and put into tables.
Say on Pay in the U.S.
Say on Pay in the U.S. grew out of precatory shareholder-sponsored Rule 14a-8 (19) proposals submitted to...