The SEC and Investor Protection: Say on Pay and A Progress Report (Part 2)

One place where investor protection has received a positive bump has been in connection with the implementation of say on pay.  Say on pay provides shareholders with an advisory vote on executive compensation.  Although put in place during the TARP period for companies on the government dole, Congress mandated say on pay for all public companies in Dodd-Frank.

How has it been working?  According to Commissioner Aguilar, very well.  As he described in a recent speech:

• First, say-on-pay seems to have resulted in increased communication between shareholders and corporate management. Reports seem to indicate that both shareholders and corporate management are pro-actively initiating discussions regarding executive compensation, which is far from the predictions that say-on-pay would lead to disrepair or at best be ineffective

Moreover, the communication has gone beyond compensation issues.

• There seems to be real evidence that say-on-pay is one catalyst to increasing shareholder engagement more broadly. According to a recent study, the level of engagement is continuing to increase. Additionally, the study reported that 80% of the surveyed corporations said that the dialogue with investors was always or usually successful.

More than improving communications, say on pay has apparently had a salutary effect on compensation practices. 

• some pay practices appear to be changing in deference to shareholders’ views. Some companies have actually altered the pay and benefits of top executives. Many companies are putting in more performance-based compensation plans and they are addressing items that shareholders often criticized, such as: excessive severance; perks; federal income tax payments; and pensions. For example, approximately 40 of the Fortune 100 companies have eliminated policies that had the company pay certain tax liabilities of executives. As another example, General Electric modified the pay of its CEO two weeks prior in anticipation of the shareholder vote, deferring the vesting of certain options and conditioning the vesting on whether the company meets certain performance targets. According to news reports, this was apparently done to avoid losing a say-on-pay vote.

In other words, a shareholder advisory vote on compensation resulted in more communication with management and reforms in substantive compensation practices.

Say on pay, which has been around for most of a decade in some other countries, only arose in the United States after considerable shareholder effort.  Shareholder access is similar.  What one has to wonder, though, is whether these reforms would have been necessary had management been willing, in the first place, to communicate in a more meaningful way with shareholders and to reflect their views in the approach to compensation. 

In other words, the goal is more communication.  It suggests that if management wants to alleviate the pressure for additional shareholder oriented reforms, it should make certain that the communication spurred by say on pay leads to a broader discussion of shareholder interests.  To the extent this occurs, shareholders will have less need for additional governance reforms that are effectively designed to promote the same goal.