Over the past decade, public companies large and small have been taking note of the increasing impact of shareholder votes on their governance and compensation practices, particularly with the rise of shareholder activism. But new research from Columbia Business School suggests that corporate management continues to have extraordinary influence on voting outcomes.
“Shareholder votes are becoming increasingly important,” said Fabrizio Ferri, co-author of the study and Regina Pitaro Associate Professor of Accounting at Columbia Business School. “While attention has been given, almost exclusively, to the influence of proxy advisors, our paper is the first to quantify management’s influence on critical votes like those on executive compensation plans.”
As a result of The Dodd-Frank Act, since 2011, all public institutions are required to hold an advisory vote on executive pay, known as a “say on pay” vote. What’s lesser known is that, in 2011, there was also a vote to choose the frequency of such say on pay votes, giving shareholders a choice between an annual, a biennial or a triennial frequency. While annual voting, particularly as it relates to compensation packages, is standard in almost every country in the world, managers at some top U.S. companies put forth recommendations to decrease the frequency of say on pay votes, effectively reducing opportunities for shareholder input.
Using a sample of S&P 1500 firms, the research, titled Management Influence on Investors: Evidence from Shareholder Votes on the Frequency of Say on Pay, finds that management recommendations for any given frequency is associated with 26 percent more voting support for that frequency by shareholders – suggesting that management controls about one-fourth of the votes cast by shareholders. The estimate of management influence over shareholder votes is similar to the estimates of the influence of proxy advisors in prior studies.
“Many people have voiced concern over the excessive influence that proxy advisors have on shareholder voting, but our research shows that similar attention should be paid to the influence that management has on voting outcomes,” said Ferri. In other words, a large number of shareholders seem to mechanically follow either management’s or proxy advisors’ recommendations rather than casting informed votes.”
The study also finds that management credibility with shareholders (as defined by the number of past votes where management and shareholders votes are aligned) is a key determinant of management’s influence on voting outcomes.
Interestingly, companies that adopted a triennial voting frequency are significantly less likely to make changes to their compensation practices in response to low shareholder support (as reflected in the say on pay vote), suggesting that a less frequent vote actually reduces management responsiveness to shareholders.
The paper’s findings can help inform policymakers who are considering regulating proxy advisors and reforming the voting process. For instance, the study confirms the need for interventions in the voting process precisely because when the decision is left to managers there is less weight given to shareholder interests and votes often get ignored.
The researchers express concern over The Financial CHOICE Act, the bill introduced to roll back many provisions of Dodd-Frank, saying that it could potentially further reduce shareholder rights. As it’s currently proposed, shareholders would only get a vote on say on pay when there is a “material change” to executive compensation plans. Ferri explains that this makes sense in theory, but points to the many ways “material change” might be interpreted, liberally or conservatively, stressing that the “devil is in the details.”
To learn more about the cutting-edge research being conducted at Columbia Business School, please visit www.gsb.columbia.edu.
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