Corporate Governance

Say on Pay, Great Britain, and the Real Basis for Objection in the United States

By J. Robert Brown

There have been plenty of corporate governance reforms that have been vigorously opposed in the United States but are common practice overseas.  The separation of chairman and CEO is one example.  So is access to the proxy statement for shareholder nominees, a practice permitted in Great Britain.  The common use overseas seems to belie the argument that the governance changes will disrupt the proper management of US corporations.

Nowhere is this more clear than in connection with say on pay.  Say on pay is nothing more than an advisory vote on executive compensation.  Shareholders can say yea or nay but the board can ignore the results.  Moreover, the practice is used overseas, particularly in Britain.  Yet corporate America vigerouly opposes the practice (albeit that it may ultimately be imposed by Congress).  Why?  They know that there are pay packages put together on a regular basis that would generate shareholder outrage and possible negative votes.  They do not, therefore, want any shareholder voice on these decisions.

In Great Britain, say on pay exists but shareholders almost never vote against the package and never at banks, at least until now.  Shareholders of the Royal Bank of Scotland voted against the retirment package for the bank's former CEO.  According to the WSJ:  "The nonbinding vote marks the first time such a package has been rejected at a publicly listed U.K. bank."  The vote was a symbolic expression of disapprobation over the management of the bank.  Yet the unusual nature of the vote shows how "say on pay" can impact executive compensation and corporate governance.

In Britain, the most likely reason that pay packages are rarely voted down is that directors (specifically the chair of the board) consult with large shareholders before the vote.  Indeed, in the British Combined Code, the role of the Chair is to regularly consult with large shareholders.  Most likely, the board becomes aware of strong objections before the matter is submitted to a vote and in fact make changes to assuage the concerns.

This is what corporate American in the United States doesn't want.  They don't want to consult because if they did, institutional investors and other large shareholders would insist that the compensation be lowered as a price for not opposing the package at the meeting.  Management opposes this reform because in fact it might lead to a reduction in CEO compensation. 

Full post as published by The Race to the Bottom on April 07, 2009 (boomark / email).