Shareholder Voting and Directors' Remuneration Report Legislation: Say on Pay in the UK

• DOI: http://doi.org/10.1111/j.1467-8683.2010.00802.x
• Date: 01 July 2010
• Author: Martin Conyon,Graham Sadler
• Published date: 01 July 2010

Shareholder Voting and Directors’

Remuneration Report Legislation: Say on

Pay in the UKcorg_802296..312

Martin Conyon* and Graham Sadler

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: The paper investigates the determinants of shareholder voting and its relation to CEO pay in the

UK. The context of the study is the Directors’ Remuneration Report (DRR) Regulations of 2002. This legislation gave

shareholders a mandatory non-binding vote on boardroom pay in the UK.

Research Findings/Insights: First, we f‌ind that less than 10 per cent of shareholders abstain or vote against the mandated

Directors’ Remuneration Report (DRR) resolution. This percentage is falling over time. Second, investors are more likely to

vote against DRR resolutions compared to non-pay resolutions. Third, shareholders are more likely to vote against general

executive pay resolutions, such as stock options, long-term incentive plans, and bonus resolutions compared to non-pay

resolutions. Forth, f‌irms with higher CEO pay attract greater voting dissent. Fifth, there is little evidence that CEO pay is

lower in f‌irms that previously experienced high levels of shareholder dissent. In addition, there is little evidence that the

fraction of CEO equity pay, representing owner-manager alignment, is greater in such f‌irms. Currently, we f‌ind limited

evidence that, on average, “say on pay” materially alters the subsequent level and design of CEO compensation.

Theoretical/Academic Implications: The study provides new insights on shareholder voting and CEO pay. Theoretically,

shareholder voting is endogenously determined.

Practitioner/Policy Implications: The study provides insights for practitioners and policy makers interested in shareholder

rights, the effects on corporate governance, and say on pay in the UK. Shareholder voting appears to have limited effects on

curbing excess CEO pay. Boards and compensation committees may want to communicate better policies on executive

compensation to avert shareholder dissent.

Keywords: Corporate Governance, Shareholder Activism, Executive Pay

INTRODUCTION

In this study we investigate the relation between UK

shareholder voting and executive pay. The Directors’

Remuneration Report (DRR) Regulations, introduced in

2002, mandated boards of directors at public companies to

produce a comprehensive remuneration report and submit

it to an advisory shareholder vote at the f‌irm’s Annual

General Meeting (DRR, 2002). The so-called “say on pay”

initiative was introduced by the UK government against a

background of public outrage at rising levels of CEO com-

pensation and a putative lack of transparency in pay pack-

ages. The DRR legislation gave shareholders a voice on pay;

our study examines what they are saying and what it means.

We contribute to a nascent research stream investigating UK

shareholder voting on executive pay (Alissa, 2009; Carter &

Zamora, 2009; Ferri & Maber, 2009).

In principle, “say on pay” initiatives promote shareholder

activism, giving owners more power and inf‌luence to shape

boardroom pay. Legislation giving shareholder “voice” has

sprung up in many countries including the United

Kingdom, Australia, the Netherlands, Norway, and Sweden

(Deane, 2007; Ferri & Maber, 2009). At the time of writing,

the debate on “say on pay” is raging in the United States.

Typically, the goal of such policies is to reduce managerial

excess and mitigate concerns that pay packages are not

designed in owners’ best interests. Executive pay remains a

highly controversialsubject, recently observed in the outrage

over compensation paid to executives at many of the

*Address for correspondence: IE Business School, Madrid, Spain. E-mail:

Martin.conyon@ie.edu

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© 2010 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2010.00802.x

f‌inancial f‌irms worst hit by the credit crisis. Critical ques-

tions remain as to whether levels of CEO pay are “too high”

and whether overall pay packages are designed optimally

(Bebchuk & Fried, 2004, 2006; Core & Guay, 1999; Core,

Guay, & Larcker, 2003; Kaplan, 2008). Shareholder voting

may be one mechanism to reduce alleged egregious pay

packages (Alissa, 2009; Carter & Zamora, 2009; Cheff‌ins &

Thomas, 2001; Ferri & Maber, 2009).

Our study contributes to a broader literature on share-

holder activism, including studies that specif‌ically investi-

gate voting on proposals initiated by shareholders

themselves (Becht, Franks, Mayer, & Rossi, 2008; Cai &

Walkling, 2009; Carter & Zamora, 2009; Del Guercio, Seery,

& Woidtke, 2008; Ferri & Sandino, 2009; Gillan & Starks,

2000; Karpoff, Malatesta, & Walkling, 1996; Leech, 2001;

Martin & Thomas, 2005; Morgan & Wolf, 2007; Thomas &

Martin, 1999, 2000). However, comparatively few previous

studies have examined the connection between shareholder

voice and CEO pay in the UK. Notable recent additions to

this literature are Ferri and Maber (2009), Carter and

Zamora (2009), and Alissa (2009). We add to this literature

by f‌irst showing the factors that drive shareholder voting

dissent and second, illustrating how dissent subsequently

may affect CEO pay.

Case-study evidence suggests that shareholders are suff‌i-

ciently concerned about CEO pay and express this through

the voting mechanism (Deloitte, 2004). Notably, the promi-

nent British f‌irm GlaxoSmithKline attracted signif‌icant

adverse publicity during the f‌irst DRR proxy season of 2003.

Shareholders, unhappy with the controversial compensation

package for CEO Jean-Pierre Garnier, in particular his sev-

erance arrangements, which were perceived as “excessive”

in the media and out of line with other British f‌irms, voted

against acceptance of the RemunerationReport. The symbol-

ism of the “no” vote ultimately resulted in a more

shareholder-friendly pay package as well as signif‌icant

changes in personnel at the company (Cai & Walkling, 2009;

Ferri & Maber, 2009). Further cases of shareholder dissent

have been well publicized in other British f‌irms including

Vodafone, ITV, Unilever, and Tesco. However, it is far from

clear whether these are just isolated cases of shareholder

discord, or are symptomatic of more widespread dissension.

A study providing systematicevidence on British say on pay

is clearly warranted. More importantly it provides insights

into the general governance issue of how shareholders

might vote on pay in other dominions and the potential

effects of that shareholder say on pay.

In this study we investigate shareholder activism in rela-

tion to executive pay by way of voting outcomes on reso-

lutions at company general meetings. The study uses

polling data for a large sample of UK f‌irms for the six-year

period from 2002 to 2007. The UK institutional context pro-

vides a fertile f‌ield experiment to test say on pay legisla-

tion. We investigate the factors that determine shareholder

dissent. Given the Directors’ Remuneration Report voting

resolution is mandatory our analysis avoids otherwise

potentially important selection bias effects. The report

endorsed the so-called “comply or explain” approach, a

hallmark of UK corporate governance. This doctrine

encourages f‌irms to comply with best practice corporate

governance (i.e., “comply”), but leaves the door open for

companies to deviate from the code. If a f‌irm does deviate

from recommended best practice rules then it is permitted

to do so, but is required to explain and justify why (i.e.,

“explain”).

Our study contributes to the extant literature in the fol-

lowing ways. First, we f‌ind that shareholder voting dissent

on CEO pay is low. Typically, less than 10 per cent of share-

holders abstain or vote against the mandated Directors’

Remuneration Report (DRR) resolution. Over 90 per cent of

shareholders vote in favor of the DRR. This is an important

f‌inding. Second, using data on about 50,000 distinct resolu-

tions over the period 2002 to 2007 we f‌ind that shareholders

are more likely to vote against the DDR compared to other

non-pay resolutions such as the election of a director to the

board. Third, investors are more likely to vote against

general executive pay resolutions, such as the adoption or

amendment of stock option schemes, long-term incentive

plans or bonus resolutions compared to other non-pay reso-

lutions. These are unique f‌indings in our study compared

with other “say on pay” research. Fourth, f‌irms with high

CEO pay attract greater voting dissent. In general, our sta-

tistical models illustrate that investor voting (activism) is

endogenous. Fifth, we f‌ind little evidence that CEO pay is

lower in f‌irms that previously experienced high levels of

shareholder dissent. In addition, there is little evidence that

the equity pay-mix,representing owner-manager alignment,

is greater in such f‌irms. Overall, we f‌ind little or limited

evidence that, on average, higher voting dissent materially

alters the subsequent level and design of CEO pay.

The rest of the paper is organized as follows. Next we

consider the institutional context, related studies and the

development of the hypotheses. We then describe the data

and our econometric strategy. This is followed by the results

and conclusions.

HYPOTHESES DEVELOPMENT

Voting and the Directors, Remuneration

Report (DRR)

Since the early 1990s the UK has introducedseveral pieces of

legislation aimed at improving the accountability, transpar-

ency, and performance of the corporate governance system.

For example, the Cadbury Report (1992) addressed account-

ability and audit committee functions in the wake of notable

bank failures such as BCCI. For the f‌irst time a minimum

number of outside (independent) directors was recom-

mended for boards of directors. The Greenbury Report

(1995) resulted in wide-ranging changes to the disclosure of

executive pay, especially regarding stock options, so that

investors could get a more complete picture of the economic

costs associated with equity grants. The Greenbury Report

was also a response to widespread concern about excess pay

in the then recently privatized utilities. These principles of

UK corporate governance were then enshrined in the

Hampel Report (1998). Subsequently, the Higgs Report

(2003) made recommendations to improve the effectiveness

of non-executive (outside) directors. The history of corpo-

rate governance policies in the UK since the 1990s can thus

be viewed as a sequence of incremental steps each aimed to

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Volume 18 Number 4 July 2010© 2010 Blackwell Publishing Ltd