Corporate Governance

Shareholders Think Say on Pay Will Add Value

By Jason Cowart

While debates about shareholder rights are often conducted at a level of abstraction that does not easily lend itself to empirical proof, a group of enterprising academics recently released a paper that attempts to buck this trend, at least with respect to the controversy about so-called "Say on Pay" proposals.  These academics analyzed the stock price reaction of companies following the House of Representative's decision to pass a Say on Pay bill. 

Not surprisingly, the analysis seems to suggest that the "market "believes that such votes would add value, especially for firms with weak corporate governance.  We find this particularly interesting because those who often argue against such proposals are often the same folks who advocate the loudest for faith in "the market." Why, we might ask, isn't the market to be trusted on this issue?

Happy New Year.

The Abstract of the piece follows:  The post Sarbanes-Oxley Act period is associated with several initiatives designed to give shareholders a greater voice in the boardroom. The latest of these initiatives is the Say-on-Pay Bill (H.R. 1257) which passed the House of Representatives on April 20, 2007 by a 2 to 1 margin. This bill does not limit CEO pay but requires an advisory shareholder vote on executive compensation packages. Using the abnormal return of 1,245 firms surrounding the House passage of this bill, we examine whether the market interprets shareholders? say on executive pay as adding or subtracting firm value. Stocks of firms with positive abnormal CEO compensation react in a significant, positive manner to the Say-on-Pay Bill. The positive market reaction is stronger among the firms with weaker, but not the weakest governance. In addition, abnormal returns are higher in the subset of firms more likely to receive higher disapproval votes from shareholders and firms more likely to implement changes under the pressure of shareholder votes. Thus, the bill has the greatest impact among the subset of firms most likely to benefit and implement changes. Given the uncertainty surrounding passage, implementation and efficacy of this proposed advisory vote, the results are likely to understate the actual impact of Say on Pay legislation. Our findings suggest that the market views this legislation as value-creating for the companies where it is likely to have the most impact. These results provide important evidence for the current debate regarding the Say-on-Pay legislation in Congress and shareholder access to proxy. Our results also shed light on the role of activist investors.

Full post as published by PomTalk on December 28, 2007 (boomark / email).