The Importance of Shareholder Activism: The Case of Say‐on‐Pay

• Date: 01 May 2016
• Author: Konstantinos Stathopoulos,Georgios Voulgaris
• Published date: 01 May 2016
• DOI: http://doi.org/10.1111/corg.12147

The Importance of Shareholder Activism: The

Case of Say-on-Pay

Konstantinos Stathopoulos and Georgios Voulgaris*

ABSTRACT

Manuscript Type: Review

Research Question/Issue: This study focuseson the role of Say-on-Pay as a mechanism that aims to promote the efficiency of

corporate governance by providingan additional channel for the expression of shareholder “voice.”Initially introduced in the

UK, Say-on-Payhas subsequently been adopted ina large number of countries and ithas recently received significantattention

from regulators, media, and thegeneral public. The purpose of thisstudy is to review prior literature related to Say-on-Pay and

its impact on firm value and corporate decision making.

Research Findings/Insights: Our studyhighlights the interdisciplinarynature of research on Say-on-Pay. Wealso shed light on

conceptual gaps and empirical discrepancies in prior studies, indicating that many questions linked to Say-on-Pay and its

importance for the executive pay-setting process remain largely unanswered.

Theoretical/Academic Implications: At a theoretical level,we highlight potential areas for development of the existing theoret-

ical framework for Say-on-Pay, which is at present rather limited and primarily influenced by agency theory. At an empirical

level, we propose a substantial number of avenues for fruitful future research on this topic.

Practitioner/Policy Implications: In the light of recent proposals for extendingthe role of Say-on-Pay withinthe corporate gov-

ernance framework,our findings are particularlyrelevant to regulators.More thought is neededabout changing its nature from

advisory to binding, as the degree of its effectiveness and thedynamics of the voting process are still unclear. Our study could

also be informative for the media and the general public, especially given the increasing attention afforded to Say-on-Pay.

Keywords: Corporate Governance, Say-on-Pay, Shareholder Activism, Shareholder Voting

INTRODUCTION

Shareholder activism has played a key role in changing

corporate decision making over recent years (Goranova

& Ryan, 2014; Smith, 1996). The increased shareholder scru-

tiny of corporate practices has been significant and is evident

in a number ofcountries. As a result, mediaorganizations talk

about a “shareholder spring”(Burgess & McCrum, 2012).

Shareholder concerns regarding corporate policies are pre-

dominantly focusedon the efficiency of corporate governance

practices within a firm (Gillan & Starks, 2000). In particular,

proposals by boards of directors regarding executive pay

arrangements have attracted shareholder voting revolts on a

number of occasions (Ertimur, Ferri, & Muslu, 2011; Thomas

& Martin, 1999).

Our focus in this paper is on shareholder voting on execu-

tive pay and,more precisely, on a corporategovernance mech-

anism commonly known as Say-on-Pay. Say-on-Pay was

initially introduced in the UK in 2002 and mandates an advi-

sory shareholder vote on executive remuneration proposed

by the board of directors. A number of countries have followed

the UK with the introduction of similar legislation, including

the US, Australia, the Netherlands, Norway, Switzerland,

and Sweden. The purpose of this mechanism is to promote

transparency by providing a new means of expression of

shareholder voice, and hence to improve corporate governance

efficiency (Conyon & Sadler, 2010). This study discusses and

critically evaluates existing research on Say-on-Pay and also

provides suggestions for future research.

We find that research so far focuses on what we call the

“intended”consequences of Say-on-Pay and follows two

main paths. First, a number of studies examine the market

reaction to the introduction of Say-on-Pay across different

countries. We find evidence that the direction and degree of

this reaction varies under different settings, a result which

raises doubts about shareholders’perceptions regarding the

effectiveness of Say-on-Pay. Second, several papers focus on

the impact of Say-on-Pay-related voting outcomes on execu-

tive pay arrangements and firm decision making in general.

Our review indicates that prior research fails to provide

conclusive evidence that there is a strong impact of share-

holder dissatisfaction, manifested by high voting dissent, on

firm policies. We argue that these conflicting results can be

attributed mainly to research design issues that invoke bias

*Address for correspondence: Georgios Voulgaris, Warwick Business School, The

University of Warwick, Coventry CV4 7AL, UK. Tel: +44 24 765 73132; E-mail:

Georgios.Voulgaris@wbs.ac.uk

© 2015 JohnWiley & Sons Ltd

doi:10.1111/corg.12147

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Corporate Governance: An International Review, 2016, 24(3):359–370