The Hearing on Say on Pay

Steve Kaplan posted below on the hearing that the Financial Services Committee of the House of Representatives held last week on proposed legislation that would require public companies to hold each year an advisory shareholder vote on the company’s executive compensation in the preceding year.

In my written testimony, I explained: (1) the significant concerns that investors still have about existing executive pay arrangements; (2) the way in which advisory votes by shareholders could help address these concerns; (3) why the weakness of existing shareholder rights in the US makes the need for additional tools for investors greater in the US than it was in the UK (which now mandates shareholder advisory votes on compensation).  I also examined and responded to several possible objections to shareholder advisory votes.  Because I am considering developing my written statement into a piece on the subject, any comments or reactions either on the blog or directly to me would be most welcome.

At the hearing, Steve Kaplan and Business Roundtable President John Castellani offered a much more favorable assessment of the executive pay landscape than I did.  I stressed in my oral testimony that the Committee did not have to make a choice between these alternative accounts.  What matters most is not how Steve Kaplan or John Castellani or Lucian Bebchuk grade companies’ performance in this area but how investors view the subject.  There is no question that many investors have serious and legitimate concerns.  The board of a given company and the marketplace cannot conclusively infer from the panelists’ analysis how the company’s shareholders view its pay arrangements.  Advisory votes would make this clear.

Although I support introducing advisory votes on compensation as a beneficial and moderate step, I stressed in my oral testimony that they would not fully address the problems of executive pay.  We should also make it easier for shareholders to replace directors.  (A full account of the election reform I support can by found in The Myth of the Shareholder Franchise, which will be published soon by the University of Virginia Law Review.)  Indeed, without election reform, boards might pay less attention to the outcome of advisory votes than they do in the U.K.