Written By: Thomas Dubbs
Senior Partner
Labaton Sucharow LLP

The 2012 UK annual general meeting season has set a new record for shareholder rejections of remuneration reports. The six negative shareholder votes – the latest, a resounding 60% rebuff to Sir Martin Sorell and WPP PLC – now surpass the previous record of five rejections, which occurred in the darkest hours of the Great Recession in 2009.

Some commentators have termed this phenomenon the UK’s “shareholder spring”, characterising these somewhat surprising votes as “warning shots” fired by “fed up investors” in an “escalating shareholder revolt”. But is there really an effective shareholder revolt in full swing, or does the so-called “shareholder spring” merely highlight the weaknesses in corporate governance with respect to managing executive remuneration?

The UK was the first to enact “say on pay” regulations, eight years before the US implemented comparable rules in 2011 with the Dodd-Frank Act. Both jurisdictions have non-binding advisory votes on executive remuneration, but differ in several other respects. The UK requires an annual vote on compensation, while the US permits votes to be held less frequently, but every three years at a minimum. The UK requirements include a “comply or explain” provision which compels a company to identify and justify its departure from national corporate governance standards. The US provides shareholders with the opportunity for an advisory vote on “golden parachute” arrangements, basically severance payments made in connection with M&A transactions.

Both in the UK and the US, the primary purpose of these regulations was to promote greater transparency, not necessarily to impact the size or growth of executive remuneration. Judged by this original intent, “say on pay” regulations have been largely successful in several ways. The bright spotlight, shone by shareholder activists and the media, has promoted discussion and disseminated information on executive remuneration. The high-profile opinions of the ISS and Glass Lewis have given almost celebrity status, among institutional investors at least, to the “Directors’ Remuneration Report” (DRR). In the US, the equivalent “Compensation Discussion and Analysis” has ushered in a far more consistent discussion in the proxy statement of peer group selection and the decision-making process, issues that were previously obtuse, if not deliberately obfuscated.

Transparency has certainly followed “say on pay” initiatives in the UK and US, but what effect have they had on the size and growth of actual executive remuneration? In fact, the research tells us, not very much.

One study from the IE Business School1 found that less than 10% of UK shareholders abstain or vote against the DRR. Although clearly a low incidence of rejection, shareholders are still more likely to vote against the DRR in greater numbers than they do against any nonpay resolutions. The study also indicated that companies that experienced high levels of shareholder dissidence on remuneration did not exhibit lower CEO pay compared to their peers. In short, the evidence suggests that “say on pay” rules have had, on average, little or no effect in altering the levels and designs of CEO remuneration. In fact, a recent survey of CEO pay at the FTSE 100 companies demonstrated that CEO salaries increased by 13% in 2010 and 10% in 2011, with 25% of the CEOs receiving a 41% increase or more in total remuneration in 2012.2 Herein lie the combustible ingredients of the “shareholder spring.”

Aware of this pattern, the UK Department for Business, Innovation and Skill (BIS) has presented to Parliament a proposal to stiffen the “say on pay” rule which is expected to be law in 2013. In short, the vote on remuneration policy would become binding, rather than advisory. The vote would be held at least every three years, unless there were major changes in remuneration. Thus, once a remuneration policy is approved by shareholders, companies would be obligated to operate within that framework in determining CEO pay. The threshold for approval would be a simple majority. Companies would be required to give one, clear compensation figure for executives that includes salary, pension, options and bonus. Further, the proposed rules mandate shareholder approval for exit or severance payments.

There are, however, nettlesome details that have yet to be ironed out. For example, what happens if shareholders fail to approve the remuneration policy in a given year? What policy will govern executive pay at that point? Will the policy of the prior year prevail, or will a special shareholder meeting have to be convened to consider a revised policy? The impact on recruiting is also an issue, since remuneration packages to attract new CEO talent will be constrained by the guidelines of approved pay policies. Finally, will shareholders ironically be more restrained in voting against CEO remuneration when their votes are binding? Keep in mind that 60% of WPP shareholders voted against the CEO’s pay package, but in the voting that really counted, only 2% opposed his re-election as a director.

It appears that the UK at least is moving away from “say on pay” regulations, whose primary purpose is to promote transparency, towards new regulations that attempt to directly and materially affect the levels of CEO remuneration. The “shareholder spring” is, in fact, much more about the latter than the former. The original “say on pay” rules have made CEO remuneration more comprehensible to the investing public, but they have not materially slowed the growing gap between CEO and employee pay. Narrowing that gap is apparently the goal of the next phase of remuneration regulation.


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Published: August 3, 2012
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