Say on Pay in Italian General Meetings

Our paper, Say on Pay in Italian General Meetings: Results and Future Perspectives, provides an analysis of the empirical data of shareholders’ say on pay in Italian general meetings in 2012, 2013 and 2014. Say on pay, a shareholders’ advisory vote on a company’s remuneration policy, was introduced in Italy following the European Commission (EC) Recommendations N. 2004/913/EC, N. 2005/162/EC, N. 2009/384/EC and N. 2009/385/EC, which allowed member States to choose between implementing a binding or non-binding advisory shareholder vote on a company’s remuneration policy. Like most European states, Italy has opted for the “weaker” non-binding option. Reference is made to both approval votes (by controlling shareholders) and dissenting votes sometimes casted by minority shareholders (mainly, foreign institutional investors). The dissenting vote, in particular, shows a paramount critical value as originating by shareholders who are independent from the directors involved by the resolution—unlike the controlling shareholders who have nominated and subsequently elected the directors (to whom may often be linked by family or economic ties). In recent years, a significant increase in voting by minority shareholders, mainly foreign institutional investors, regarding—but not limited to—remuneration policies has been noted. This is a direct consequence of the procedural changes introduced by the Shareholder Rights’ Directive n. 36/2007/EC (e.g. record date, reduction of threshold to call special meeting, relaxation of proxy voting and solicitation rules, extension of time—prior to general meeting—to release relevant information for the items of the agenda and translation of documents into English, etc.).

In our paper, we also consider the consequences of the shareholders’ say on pay results on issuers’ remuneration policies by examining any policy changes undertaken in the subsequent financial year. Shareholders’ voting on remuneration policies, although non-binding, produces significant reputational effects on the company’s management.  The impact of institutional investors’ votes represents an important stimulus for the general improvement of transparency in executive officers’ incentive plans. Numerous companies have, in fact, undertaken structured engagement programs (with proxy advisors and institutional investors) in order to comprehend, to the fullest, their assessment metrics and to improve, where possible, the alignment with international best practices. From this consideration it should follow that the weak option of say on pay has proven to be efficient; however, the problem is that such dialogue has proven to be much more difficult in smaller (in terms of capitalisation) listed companies—which is almost 80% of Italian listed issuers—where no improvement in conceiving the remuneration policy did actually occur. The examination of the votes cast in smaller companies (belonging to FTSE Mid Cap Index) from 2012 to 2014, shows that overall shareholders’ consent actually went down from 95.4% to 92.6% and the consenting votes cast by minority shareholders, in particular, fell from 66.2% to 63.4 %. This result clashes with the voting cast in general meetings of companies belonging to the main FTSE Mib Index. Therefore the current regime cannot be deemed as satisfactory.

Considering the Italian ownership structure, however, even the provision of a binding vote—per the Proposal issued in 2014 by the EC to amend the Shareholder Rights’ Directive n. 36/2007/EC—would not make the general meeting evaluation of the remuneration policy more objective and independent for all listed companies. For these reasons, the argument in this paper is that Italian legislature should implement the binding shareholders’ vote—provided under the Proposal to amend the Shareholder Rights’ Directive n. 36/2007/EC—by correcting it to require the approval of the remuneration policy by the majority of the outside shareholders (i.e. MOM approval). Such a voting mechanism proves to be even more necessary considering the new provisions recently enacted in Italy (by  Article 20 of Law Decree n. 91 of June 24, 2014 converted into Law on August 11, 2014—under Articles 127-quinquies and 127-sexies of Leg. Decree n. 58/1998) on multiple-voting and loyalty shares that may amplify, if introduced in bylaws, the dominant shareholders’ voting power.

The full paper is available for download here.