[This story previously appeared in Securities Regulation Daily.]
By Anne Sherry, J.D.
An academic study on say-on-pay patterns suggests that small shareholders are more likely than large shareholders to use the nonbinding vote to govern their companies, although larger shareholders must still be present to compel the board to take action when support for the compensation plan is low.
The paper by Miriam Schwartz-Ziv of Michigan State University and Russ Wermers of the University of Maryland details the professors’ finding that companies with more shareholders holding at least 5 percent of outstanding shares are more likely to secure favorable say-on-pay votes. Furthermore, the larger the fraction of shares held by such larger shareholders, the more likely that shareholders support a longer interval between say-on-pay votes. The professors interpret these results to mean that large shareholders prefer to confront management directly and privately, perhaps because they wish to avoid a share price decrease that may result from a negative say-on-pay vote.
The paper also investigates voting by mutual funds and the impact on the advisory say-on-pay vote of executive holdings. In particular, the larger the fraction of shares held by executives, the more likely shareholders are to support the compensation plan and to support a biennial or triennial say-on-pay vote, as opposed to annual. Mutual funds do not follow this pattern, however, suggesting that institutional investors differentiate between tying compensation to performance versus already having a large fraction of shares held by executives.
Finally, the paper concludes that when ownership is concentrated, companies are likely to award less excessive compensation in the year after an unenthusiastic say-on-pay vote and tend to choose peer companies more closely resembling their own. The authors infer from this that boards are especially anxious to quell perceived shareholder dissatisfaction in order to avoid a confrontation with large shareholders.