Gender diversity and say‐on‐pay: Evidence from UK remuneration committees

• Date: 01 September 2019
• Author: Francesca Cuomo,Nasser Alkalbani,Christine Mallin
• DOI: http://doi.org/10.1111/corg.12292
• Published date: 01 September 2019

ORIGINAL ARTICLE

Gender diversity and say‐on‐pay: Evidence from UK

remuneration committees

Nasser Alkalbani

1

|Francesca Cuomo

2

|Christine Mallin

2

1

Business Studies Department, Salalah College

of Technology, Salalah, Oman

2

Norwich Business School, University of East

Anglia, Norwich, UK

Correspondence

Nasser Alkalbani, Business Studies

Department, Salalah College of Technology,

Salalah 608, Oman.

Email: ns.alkalbani@sct.edu.om

Francesca Cuomo, Norwich Business School,

University of East Anglia, Norwich NR4 7TJ,

UK.

Email: f.cuomo@uea.ac.uk

Abstract

Research question/issue: We examine whether the presence of women on the

remuneration committee has an influence on say‐on‐pay voting.

Research findings/insights: Based on panel data from the UK's FTSE 350 firms

from 2003 to 2015, we find that firms with women on the remuneration committee

reduce shareholders' dissent via say‐on‐pay. However, only firms with a critical mass

of more than 30% women on this committee are more likely to have less share-

holders' dissent via say‐on‐pay (i.e., the presence of 30% women or less on this

committee is not sufficient).

Theoretical/academic implications: Our results provide empirical evidence that the

gender diversity of directors on the remuneration committee plays a significant role in

shaping shareholders' dissent via say‐on‐pay in the United Kingdom. Our results also

provide empirical support for some of the previous studies that draw on critical mass

theory that imply that women are more effective monitors when they make up a

critical mass of more than 30%.

Practitioner/policy implications: Our results could provide regulators with evi-

dence in favor of improving women's representation on UK remuneration commit-

tees. In addition, our results could help shareholders and nomination committee

members understand the importance of having women on UK remuneration commit-

tees, as they are more likely to avoid suboptimal pay and align directors' remuneration

packages more closely with shareholders' expectations. Finally, our results could also

attract the attention of main stakeholders and the media, especially given their

increasing attention both to gender diversity and say‐on‐pay.

KEYWORDS

Corporate Governance, board committees, compensation committee, ownership mechanisms,

shareholder activism, shareholder resolutions

1|INTRODUCTION

Gender diversity on boards has gained tremendous attention from

policymakers, institutional investors, and academics. Policymakers

believe that women are underrepresented on corporate boards

(Adams, 2016; Adams, de Haan, Terjesen, & van Ees, 2015; Terjesen,

Aguilera, & Lorenz, 2015) and that women are facing many challenges

hindering them to access corporate boards (Gabaldon, De Anca,

Mateos de Cabo, & Gimeno, 2016). Therefore, they have issued

regulations to improve female representation on corporate boards

(Terjesen et al., 2015). Some of these regulations have been in the

form of mandatory quotas (e.g., in Norway and France), and others

Received: 24 February 2017 Revised: 12 May 2019 Accepted: 13 May 2019

DOI: 10.1111/corg.12292

378 © 2019 John Wiley & Sons Ltd Corp Govern Int Rev. 2019;27:378–400.wileyonlinelibrary.com/journal/corg

in the form of soft recommendations (e.g., in the United Kingdom and

the United States). Additionally, in the 1990s, some institutional

investors already promoted the idea of having more women on cor-

porate boards, but several institutional investors have recently

increased their actions targeting firms whose boards have little gen-

der diversity (Marquardt & Wiedman, 2016) with the aim of enhanc-

ing their female representation on corporate boards (Kumar &

Zattoni, 2016). Women's representation in the boardroom has seen

some improvement in recent years. However, previous empirical

studies about the economic benefits of board gender diversity on

firm outcomes (including firm performance) are still limited or their

results are unclear, and so scholars have called for more studies to

better understand this area (see, e.g., Kirsch, 2017; Sila, Gonzalez,

& Hagendorff, 2016). Kumar and Zattoni (2016) stated “more

research is needed to better understand the characteristics of female

directors, the interests they represent, the contribution they provide

to board and to firm performance, and so on.”This paper contributes

to this debate by investigating whether gender diversity on the

remuneration committee is associated with greater shareholder satis-

faction via say‐on‐pay voting.

Recent financial crises and scandals have created public anger and

unrest regarding remuneration packages, which have led to calls for

the reform of remuneration policies. The United Kingdom was the first

country to introduce a mandatory nonbinding shareholder vote on the

remuneration package in late 2002 (Stathopoulos & Voulgaris, 2015).

This voting approach is known as the “say‐on‐pay,”a tool which can

be used by shareholders to express dissent about the recommenda-

tions made in remuneration reports (Mallin, 2016; Mangen & Magnan,

2012). Since then, many research studies have investigated the ante-

cedents and the consequences of say‐on‐pay voting (for recent

reviews, see Stathopoulos & Voulgaris, 2015; Obermann & Velte,

2018). Among some of these antecedents that most affect share-

holder dissent via say‐on‐pay voting are higher CEO remuneration,

firm performance and firm size, and weak boardroom governance

(Alissa, 2015; Conyon, 2016; Conyon & Sadler, 2010; Ferri & Maber,

2013; Gregory‐Smith, Thompson, & Wright, 2014).

In this paper, we focus on the effect of women on the remunera-

tion committee as previous studies have shown women are more

likely to be effective monitors (Adams & Ferreira, 2009; Carter,

Simkins, & Simpson, 2003), more ethical (Cumming, Leung, & Rui,

2015), and more likely to reduce information asymmetry (Abad,

Lucas‐Pérez, Minguez‐Vera, & Yagüe, 2017; Srinidhi, Gul, & Tsui,

2011). In addition, there are presently limited studies on the effect

of women on the remuneration committee (Kirsch, 2017; Obermann

& Velte, 2018). Scholars have called for additional studies on the role

of women on the remuneration committee and then on executive

remuneration, including CEO pay with the aim to understand if they

help to avoid suboptimal pay, and hence reduce shareholders' dissent

(Filatotchev & Wright, 2017; Kirsch, 2017; Strobl, Rama, & Mishra,

2016). In particular, we build on agency and critical mass theories with

the aim to study if the presence of women or only of a critical mass of

more than 30% women on the remuneration committee are more

likely to decrease shareholder dissent voting on executive

remuneration arrangements proposed by the management (i.e., say‐

on‐pay). We believe that this research question is important both with

respect to theorizing and with respect to the measures used in analy-

ses on say‐on‐pay.

We focus on the role of say‐on‐pay as a mechanism that aims to

reduce agency problems and to promote the efficiency of corporate

governance by providing an additional tool for shareholders' interven-

tions in firms' governance via the “voice”channel rather than the “exit”

channel (Hillman, Shropshire, Certo, Dalton, & Dalton, 2011; Mangen

& Magnan, 2012; Stathopoulos & Voulgaris, 2015). Among the various

corporate governance mechanisms that institutional investors may

choose to utilize to engage with their investee companies, voting is

considered the least costly for shareholders (Goranova & Ryan,

2014). Moreover, voting gives the shareholders a means of conveying

their disapproval on the proposed executive remuneration by voting

against or abstaining (Goranova & Ryan, 2014). Although previous

studies tend to show that shareholders vote with incumbent manage-

ment (Armstrong, Gow, & Larcker, 2013; Conyon & Sadler, 2010; del

Guercio & Hawkins, 1999; Listokin, 2010; Smith, 1996), a recent study

by Sauerwald, Van Oosterhout, and Van Essen (2016) argues that

shareholders' dissent can be viewed as an effective corporate gover-

nance mechanism even though it may not affect the voting outcome

directly. According to some studies, shareholders are publicly making

their views known with their dissent voting indicating that they are

not satisfied with the present management and thereby leading to a

negative evaluation of a firm's corporate governance (Hillman et al.,

2011; Sauerwald et al., 2016). Previous studies identify several nega-

tive effects of dissenting shareholders on firm outcomes such as the

decrease of firm value, the replacement of the CEO and of other board

members, and even the takeover of the firm in the long term (for

recent reviews, see Goranova & Ryan, 2014; Obermann & Velte,

2018).

To avoid such negative consequences, previous studies on say‐on‐

pay show, for example, that companies significantly change their

remuneration practices to adhere to better corporate governance

standards when criticized by their active shareholders via say‐on‐pay

(Ferri & Maber, 2013). At the same time, prior work shows that boards

do not appear to respond to shareholder dissatisfaction systematically;

however, they do respond selectively and swiftly (Alissa, 2015). Fur-

thermore, previous studies identify not only outcomes at firm level

but also several other outcomes that dissenting shareholders generate

at investor and environmental level (for recent reviews, see Goranova

& Ryan, 2014; Obermann & Velte, 2018).

None of these studies has investigated the associations between

gender diversity and say‐on‐pay voting. Following prior work

(Conyon & Peck, 1998; Daily, Johnson, Ellstrand, & Dalton, 1998),

we focus on the characteristics of the remuneration (compensation)

committee, as it makes the vast majority of decisions related to

executive remuneration. First, we build on agency theory to posit

that the greater the presence of women on the remuneration com-

mittee, the lower the proportion of shareholder dissent votes via

say‐on‐pay. However, several studies on board diversity fail to show

a clear and consistent positive effect of women on firm outcomes

ALKALBANI ET AL.379