Views on improving the integrity of global capital markets
26 July 2011

Will “Say on Pay” Go Global, or Has It Already?

Much of the focus in this year’s global proxy season has been on the advisory vote on pay —more colloquially known as “say on pay” — in the United States. With thousands of companies facing a vote on executive pay for the first time, the attention on the U.S. proxy season is understandable.

That said, say on pay has been a standard in a number of markets for years. The Netherlands currently requires a binding shareholder vote on executive pay, while a non-binding vote is the model in the U.K., Australia, Norway, Spain, France, and Sweden.

Starting with the U.S. — and its pivotal first year of requiring major public companies to let shareholders vote on executive compensation — let’s span the globe to see what say on pay has been up to this year, and where it may be going.

United States
Both sides of the say-on-pay argument may be laying claim to victory this year. Those who support say on pay will point to the record 39 companies so far in 2011 (versus only three in 2010) that have received a failed or “no” vote, or less than 50 percent support this year. Those claiming say on pay is a waste of time will point out that, of the more than 2,500 U.S. companies that held such a vote this year, over 98 percent received a “yes” vote. Another report shows that 8 percent of companies in the U.S. earned support of 70 percent or less; not perhaps overly alarming, but indicative of a trend of greater investor dissatisfaction on pay issues. For a more detailed review of say on pay in the U.S. in 2011, check out this excellent review by Schulte Roth & Zabel.

We therefore conclude that shareowners are using the say-on pay-vote judiciously, appearing to vote against current pay plans they deem the most egregious. This discretion on say on pay seems to contradict the argument that too many investors blindly follow the recommendations of proxy advisory services. For example, investors voted “no” against pay plans at U.S. companies less than 2 percent of the time, while Institutional Shareholder Services Inc. (ISS) — the largest proxy advisory service in the U.S. — recommended a  “no” vote on say on pay at 13 percent of Russell 3000 Index companies.

There does seem to be a price to pay in the U.S. for a failing say-on-pay vote. You guessed it — litigation. In 2010, two of the three companies that failed to receive a majority of support in say on pay were sued by their shareowners. So far in 2011, only four of the 39 companies that did not receive majority support have been sued by shareowners, with allegations of breach of fiduciary duty and corporate waste prominent among the arguments against corporate directors. Expect more suits to come and many of these companies to step up engagement with shareowners.

The say-on-pay movement in Canada has not resulted in any proposed legislation to mandate advisory votes on executive compensation levels or practices. However, some Canadian institutional investors and corporate governance groups are beginning to press for the voluntary adoption of say-on-pay practices.

Indeed, in January 2010, the Canadian Coalition for Good Governance (CCGG) proposed a model board policy on shareholder engagement and say on pay that recommended a board “develop practices to increase engagement with all of its shareholders as is appropriate for its shareholder base and size.” Such practices could take the form of surveys, town halls, meetings with significant shareholders, or specific questions posed as part of the proxy solicitation process.

Meanwhile, Canada’s leading association for corporate directors has urged regulators to reject mandatory rules requiring companies to hold say-on-pay votes of shareholders on their executive compensation plans.

To this point, say on pay has been adopted on a voluntary basis by 49 of Canada’s largest public companies, including all the largest banks and insurers.

As of January 2011, the Ontario Securities Commission was taking a wait and see attitude on whether to implement any kind of mandatory say-on-pay rule in Canada.

In late April, PDG Realty earned the dubious honor of becoming the first Brazilian company at which shareholders rejected a company’s management compensation plan at the company’s annual meeting. Disclosure of maximum, minimum, and average compensations paid to publicly traded companies’ executives is now mandatory in Brazil (as of 2010), but a number of companies still do not comply with the rule.

Investors of PDG Realty finally approved the executive pay scheme in late June, but only after the company agreed to full disclosure of amounts paid to its CEO.

It remains to be seen if this is a harbinger of increased activism from Brazilian investors, or an isolated event. Tune in to Brazil’s 2012 proxy season to see.

The Corporations Amendment Bill 2011 was introduced this year, serving as a wake-up call to Australian directors.

The new rule strengthens the non-binding vote on remuneration by giving shareholders the opportunity to remove directors if the company’s remuneration report has received a “no” vote of 25 percent or more at two consecutive annual general meetings. In such an instance, shareowners would vote on whether to “spill” all board members and, if passed with 50 percent or more of eligible votes cast, would require a spill meeting within 90 days to elect directors.

According to the Australian Council of Super Investors, an association of superannuation funds, “These provisions would, for the vast majority of companies in the ASX 200, remain largely irrelevant and would act as a deterrent for recalcitrant companies that continue to ignore shareholder concerns on remuneration.” The Productivity Commission (the Australian government’s independent research and advisory body), in its report on executive pay in Australia, identified only 11 ASX 200 companies that would have met the 25 percent threshold between 2007 and 2009.

Not surprisingly, the rule was warmly welcomed by investor groups, but the Australian Institute of Company Directors called it a “heavy-handed black letter law approach” which would create unnecessary red tape.

This development bears monitoring in future years to see if, and when, the 25 percent threshold is reached in consecutive years by an Australian company.

According to the results of a recent survey by the Ethos Foundation:

“56% of the companies under review (27 companies out of 48) have proposed, at their 2011 annual general meeting, an advisory vote of their remuneration system or report, up from 38% in 2010. The rate of opposition [“no” votes] rose to more than 16% in 2011 (up from 11% in 2010). For the first time in Switzerland, a remuneration report was not approved. In fact, the remuneration report of Weatherford International received only 44% approval. The remuneration became the most contested issue at the 2011 general meetings of Swiss companies.”

Despite the increasing number of Swiss companies that have adopted say on pay, many still chose not to do so. Those that skipped a say-on-pay vote argued that they do not want to change their practices unless it is legally imposed.

European listed companies may have no choice in whether to give shareholders the final say on executive pay, depending on the outcome of a public consultation on corporate governance by the European Commission (EC).

Final comments for the consultation were due 22 July. CFA Institute has joined other investors, companies, and concerned parties in submitting comments on this consultation. Expect some final decision on say on pay in the EU sometime this fall.

Check Back Here in a Year
In the wake of the financial crisis, which saw a gross disconnect between incentives at many different levels and the interests of shareholders, we shouldn’t be surprised that investors are using tools like say on pay to introduce more accountability into the executive compensation system.

But while shareowners around the world appear to be warming to a say-on-pay standard, the details of what say on pay actually means will differ from market to market. Overall, we see such rules generally accomplishing what they were designed to do; that is, to get investors and boards talking about compensation so that many of these issues can be settled before a company’s annual meeting. We will have to check back after each proxy season to see if these conversations are actually happening.

A little accountability never hurt anyone … right?

About the Author(s)
Matt Orsagh, CFA, CIPM

Matt Orsagh, CFA, CIPM, is a senior director of capital markets policy at CFA Institute, where he focuses on corporate governance, ESG, and climate change analysis. He writes and speaks frequently on these topics on behalf of CFA Institute. His paper, Climate Change Analysis in the Investment Process was named “Best ESG Paper” by Savvy Investor in 2021.

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