Academic

ISS has called ?say on pay?--proposals seeking a non-binding shareholder vote on executive compensation?the most closely watched issue of the 2007 proxy season.  So how did the issue fare?

It seems to be gaining a lot of momentum.  According to riskmetrics' most recent proxy report, by the first half of the 2007 proxy season, some 41 say on pay proposals had gone to vote, averaging about 42% shareholder support, and seven proposals received majority support.  Moreover, as of January of 2008, some 90 proposals have been submitted calling for a say on pay, while at least three companies have agreed to provide an advisory vote on compensation.  Riskmetrics says all of these figures are remarkably high given the relative newness of the issue.  In fact, Riskmetrics compared them to similar figures in the context of majority voting?which, after considerable activism, many agree now has become the norm in most major corporations.  And like majority voting, the say on pay campaign is getting help from legislators.  Indeed, the House passed legislation that would give shareholders an advisory vote on compensation and a similar bill was introduced in the Senate.

Of course the jury is still out both on whether the Senate bill will gain any momentum and, more importantly, whether say on pay will achieve its desired result.  To be sure, say on pay measures are aimed at giving shareholders a voice in compensation issues in an effort to stem the seeming unending rise in executive compensation, particularly when such rise has occurred in the midst of economic downturn, underperformance and corporate scandals.  Advocates of say on pay point to the UK experience since some UK data suggest that similar nonbinding pay votes have served to curtail the rise in compensation in the UK.  Shareholder activists are hopeful that similar results can be achieved in the US.  But some are skeptical.  Most notably, at a recent corporate governance conference, Martin Lipton suggested that calls for say on pay were ill-advised because such measures would shift the compensation decision from boards to a small group of shareholders.  Pointing to the UK, Lipton notes that because corporations in that region do not want to risk a negative vote on their pay packages, they feel pressured to negotiate with activists? shareholders, often behind closed doors.

To be sure, one of the primary criticisms of almost all measures aimed at increasing shareholder power is that such an increase will improperly shift the balance of power, while placing such power in the hands of a small number of shareholders whose interests do not necessarily align with the broader shareholder class.  It is a criticism that has some merit.  However, most people seem to agree, albeit sometimes reluctantly, that the current balance of power has produced undesirable results, particularly with regard to compensation.  So for now, I am willing to wait and see where the say on pay movement takes us.