Recently, a St. John's law student, Jennifer Roeske, wrote a short piece about shareholder involvement in corporate governance matters and the impact that involvement may have on pay decisions. I am including her piece in this post.
"Corporate social responsibility is controversial. While some believe it is necessary to help the communities that corporations affect and see it as a way to gain an altruistic public image, ultimately it affects shareholders’ bottom line. Some shareholders may want a greater return on their investment, and therefore disapprove of corporations deviating from a focus on the “bottom-line.” This is especially true for short term investors, or investors who depend on dividends to support themselves or their loved ones.
Say-on-Pay is an internal mechanism that shareholders can use to let the corporation know whether or not they approve of its practices. It allows shareholders an “advisory vote” on the compensation of the top five executives of a corporation. In the U.S., experience has shown that the majority of corporations receiving a failing vote work strenuously to correct any deficiencies and to determine what issues shareholders had with the proposed executive pay package. Say-on-Pay opens the lines of communication between shareholders and the corporation, specifically the executives and the board. It gives shareholders a voice in corporate policy. This can include a corporation’s stance on corporate social responsibility. If shareholders are dissatisfied with the conduct of a corporation, they can vote down executive pay packages to show their dissatisfaction.The effectiveness of Say-on-Pay is a topic of hot debate. However, thus far in the U.S. companies have reacted to failed Say-on-Pay votes by fixing deficiencies and communicating with shareholders, eventually receiving a passing vote in the subsequent year. Last week, the financial post featured an article regarding the rise of theSay-on-Pay movement in Canada. While currently Canada does not require this type of vote, many companies have adopted them on their own. Additionally, the article discusses the weight these votes are carrying with boards; they are not ignored. Boards are increasingly aware of the risk of reputational damage if it ignores a shareholder vote. While the approval rating of packages on the whole is high, looking at the failed votes shows that shareholder opinion is taken seriously by corporations. Therefore, Say-on-Pay can be used by shareholders as a way of letting the corporation know their stance on corporate social responsibility."