Monday, April 21, 2014

Say-on-Pay and Corporate Social Responsibility, By: Jennifer Roeske

     In the business section of today's New York Times, there is an article about the G.M. exhibits at this past weekend's New York International Auto Show and the fact that consumers who attended seemed unshaken by the company's decision to delay the recall of millions of potentially defective cars. Even if consumers are still confident, I expect that shareholders are not.  Today's Times printed another story reporting that the recent G.M. recalls will impact the company's bottom line and that profits are expected to decline sharply. Perhaps shareholders, understanding the connection between companies that deal responsibly with consumers and profitability, will communicate with the company about socially responsible behavior.

     Recently, a St. John's law student, Jennifer Roeske, wrote a short piece about shareholder involvement in corporate governance matters and the impact that involvement may have on pay decisions.  I am including her piece in this post.

          "Corporate social responsibility is controversial. While some believe it is necessary to help the communities that corporations affect and see it as a way to gain an altruistic public image, ultimately it affects shareholders’ bottom line. Some shareholders may want a greater return on their investment, and therefore disapprove of corporations deviating from a focus on the “bottom-line.” This is especially true for short term investors, or investors who depend on dividends to support themselves or their loved ones.
            Say-on-Pay is an internal mechanism that shareholders can use to let the corporation know whether or not they approve of its practices. It allows shareholders an “advisory vote” on the compensation of the top five executives of a corporation. In the U.S., experience has shown that the majority of corporations receiving a failing vote work strenuously to correct any deficiencies and to determine what issues shareholders had with the proposed executive pay package. Say-on-Pay opens the lines of communication between shareholders and the corporation, specifically the executives and the board. It gives shareholders a voice in corporate policy. This can include a corporation’s stance on corporate social responsibility. If shareholders are dissatisfied with the conduct of a corporation, they can vote down executive pay packages to show their dissatisfaction.
            The effectiveness of Say-on-Pay is a topic of hot debate. However, thus far in the U.S. companies have reacted to failed Say-on-Pay votes by fixing deficiencies and communicating with shareholders, eventually receiving a passing vote in the subsequent year. Last week, the financial post featured an article regarding the rise of theSay-on-Pay movement in CanadaWhile currently Canada does not require this type of vote, many companies have adopted them on their own. Additionally, the article discusses the weight these votes are carrying with boards; they are not ignored. Boards are increasingly aware of the risk of reputational damage if it ignores a shareholder vote. While the approval rating of packages on the whole is high, looking at the failed votes shows that shareholder opinion is taken seriously by corporations. Therefore, Say-on-Pay can be used by shareholders as a way of letting the corporation know their stance on corporate social responsibility."  

9 comments:

  1. I like this idea. Say-on-Pay votes often reflect how the company is performing and whether top executives are entitled to the high compensation they receive. If shareholders are dissatisfied with the corporation's social responsibility policy or track record, a say-on-pay vote may cause the change they are seeking. In addition, even if shareholders don't achieve all they change they hoped for, a say-on-pay vote will initiate a dialogue on the issue between shareholders and the company.

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  2. Say-on-Pay appears to be a way for shareholders to actually communicate with the top executives on issues of importance to them. It encourages the executives to be cautious about extravagant spending therefore limiting wasted expenditure. Some argue that top executives need to earn high salaries and luxurious extras in order for the company to be competitive in terms of recruitment. However, if companies in the US have cared about the approval vote and if they receive a fail vote, work hard to change that, clearly Say-on-Pay is a positive initiative.

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  3. Say on Pay definitely sounds like a good idea. It sounds like a reasonable solution to both developing a dialogue between shareholders and Executive Boards and checking the extravagant pay packages of CEO. I would like to see data on the actual effect of Say on Pay. I realize that this has recently been implemented in the USA and that such data is unavailable now. However, I think that we should take a "wait and see," if you will, about the effects before making a judgment on Say on Pay's merits in solving the these issues. It's heart is definitely in the right place; lets see if its results are as well.

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  4. I would love to see "Say on Pay" extended to federal and state employees. It's past time that taxpayers were allowed a seat at the table with the unions and their selected cronies. Let's see how the public actually feels about the extreme compensation packages and job security that unionized government employees enjoy despite their near complete incompetence.

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  5. By Yehuda Tunkel.I congratulate you Jennifer on the insightful article. I must admit that I hardly understood the astronomical amounts given to many executives.I understand how the incentive of the good pay works, and presume that there are corporate geniuses who deserve their golden parachutes, or perhaps even more some.However, I wish that someone can create a chart and explain how every $ or millions of them is calculated and correlated to an executive's performance in order to arrive at a given amount.

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  6. I congratulate you Jennifer on the insightful article. I must admit that I hardly understood the astronomical amounts given to many executives.I understand how the incentive of the good pay works, and presume that there are corporate geniuses who deserve their golden parachutes, or perhaps even more some.However, I wish that someone can create a chart and explain how every $ or millions of them is calculated and correlated to an executive's performance in order to arrive at a given amount.

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  7. I agree that Say-On-Pay is a good thing for corporate America. It serves as a "semi-check" on the amount corporations pay its Board of Directors and high level executive employees. Granted it is a non-binding resolution, it still has power if the media reports that such resolutions are passed and nothing is done about the salaries. It is similar to the SEC's mandate to disclose whether the company has a diversity policy in place relating to the election of its Board of Directors. Both initiatives do not mandate that something is done but rather the benefits of both are that it may have the ability to "shame" a corporation into correcting broken policies.

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  8. I recently read an interesting article that said that say-on-pay has done the opposite of what it was supposed to do. People expected it to result in disapproval of executive compensation and in turn for compensation to be lowered, but in reality most executive compensation packages were approved by shareholders. This not only allows the CEOs and other executives to keep their large compensation packages, but also adds a layer of insulation to those trying to take that away and that is the layer of shareholder approval. They can simply respond that the people, being the shareholders, have spoken and have approved their compensation. The article I read made an interesting point saying that shareholders may face a sort of prisoner's dilemma in that if they disapprove of the executive compensation then the CEO may be poached by another company that is willing to pay higher, but if they remain silent then these CEOs get to retain their compensation.

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  9. I agree with the fact that If shareholders are dissatisfied with the conduct of a corporation, they can vote down executive pay packages to show their dissatisfaction.

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