Sunday, August 2, 2009

U.K. Say-On-Pay and Shareholder Empowerment

There has been some significant movement in executive pay this week: the House voted Friday to pass the say-on-pay bill that was produced by its Financial Services Committee. In light of the successful vote, I wanted to briefly follow-up with discussion of say-on-pay, as legislated in the U.K.

The Directors’ Remuneration Report Regulations came into affect in 2002, requiring among other things, that shareholders be afforded a non-binding vote on executive compensation. Only U.K. corporations listed in “major” stock exchanges are required to make public an executive compensation report. The report, then, is subject to vote at the annual shareholder meeting. Compensation data disclosed includes salary, equity compensation, and severance payments.

The results of the U.K. legislation have been scrutinized by critics as mixed. It has frequently been reported as effective in instances such as Glaxo Smith Kline in 2003. There, shareholders voted by simple majority to reject a substantial severance package for an executive who had widely been regarded as unsuccessful in recent years. However, the trend in U.K. executive salary shows continued increases over the seven year period following enactment.

Several thoughts come to mind in light of this criticism. Among them, say-on-pay is frequently advocated as a shareholder empowerment tool; permitting shareholders a more potent voice in interacting with the corporation’s board on matters of the corporation’s resources and an executive’s performance. To strictly treat it as a means of ensuring low executive pay disregards the potential for improvement in shareholder interaction and cooperation. So statistics that merely tell me that U.K. executive pay increased over a period years confuses me. Is that an accurate measurement of the success of the legislation? Has anyone asked if the shareholders felt more empowered – both over the issue of executive compensation and as a matter of ownership within the corporate structure? Was corporate governance improved as result of the enhanced interaction? Too, presumably these statistical increases have taken into account inflationary factors, as well as the culture of the years preceding our current economic crisis (for if I recall correctly, everyone was making a lot of money at the time, and no one had a problem with it – shareholders or executives).

A recent Time’s article discussed Aflac’s supporting the idea of shareholder empowerment. Not as a means to limit executive pay, per se, but as a means to specifically improve shareholder relations. The counter argument, and frequent defense, is that shareholders already are empowered with tools to counter any problems they may have with the compensation packages awarded. That is, they can vote-off any director from the board that they disagree with, including decisions concerning executive compensation. Too, data reveals that despite the current drama engendered by the say-on-pay movement, among the nearly two dozen American corporations that have voluntarily empowered say-on-pay votes, none have experienced a successful shareholder rejection of an executive compensation package.

Out of interest, it should be noted that American say-on-pay legislation is not as strict as it could be. Similar legislation adopted in the Netherlands (2004), Sweden (2006), Norway (2007), Spain (2008), and France (2009) all require a binding shareholder vote on compensation packages.

(Photo courtesy of Petre Kratochvil).

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