Doubly-Binding Director Say-on-Pay

Michael R. Levin is the Founder and Editor of The Activist Investor. This post is based on his TAI memorandum. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance (discussed on the Forum here) and Pay Without Performance: The Unfulfilled Promise of Executive Compensation both by Lucian A. Bebchuk and Jesse M. Fried and The Growth of Executive Pay by Lucian A. Bebchuk and Yaniv Grinstein.

The TSLA board comp case was vastly interesting and even some fun. I learned a lot about Delaware Chancery Court, figured out how to navigate the befuddling File-and-Serve system, and visited Wilmington to argue our objection to the proposed settlement. I had a terrific time talking with Ron Orol at The Deal about the experience.

You’ll recall the proposed settlement provided for TSLA shareholders to vote on director pay. We objected because it arguably did not require directors to abide by the vote result.

As we wait for Chancellor McCormick to issue her opinion on the settlement, which we hope will include an order for the parties to amend its terms to incorporate the substance of our objection, we ponder what else might happen. Does director say-on-pay make sense only at TSLA, or could it help shareholders at other companies?

We decided to find out. As far as we know, no other company has tried this before.

Also, we’ve long thought about ways for shareholders to improve our limited authority over directors. Awhile ago we wrote an essay about the foundations of that limited authority, as a sort of novel and confounding agency problem. It pointed toward compensation as a critical point between shareholders and the BoD. It’s as pure a conflict as we find anywhere: BoDs design and approve their own pay with no oversight from the shareholders who elect them and whose interest they should represent.

As we studied the TSLA settlement, we quickly understood it represented a real live example, at a significant US company, of what we first envisioned only theoretically. It could launch an entire new way for shareholders to influence directors.

Thus, we developed a shareholder proposal for director say-on-pay. Long-time governance activist John Chevedden took an interest in it, and offered to submit it at some portfolio companies. Thus far two indicated they will include it on the 2024 AGM agenda and proxy statement. We await the result of the SEC no-action process at ten others.


As we have noted before, we have minimal experience with shareholder proposals, and we find it curious in many ways. In particular, we think shareholders can improve on the longstanding practice of merely suggesting a company consider a corp gov change. Thus, we structured the proposal as an actual bylaw amendment, rather than a resolution urging a company to adopt a bylaw amendment.

The subject lends itself to a bylaw term. Most US companies have a bylaw section that allows the board to pay itself. Thus, we drafted a straightforward amendment to that section. The language falls well within the 500-word limit the SEC allows for shareholder proposals, and permits a persuasive supporting statement.

If shareholders approve the proposal, then they amend the bylaws. The company must implement it.

Further, we wrote the bylaw term to provide for a binding vote on director pay. The current executive say-on-pay vote is of course advisory; it merely expresses only shareholder sentiment. The director pay vote will literally approve what pay directors receive. If the company fails to win that vote, then directors … well, don’t get paid (more below).

Three easy steps

The proposal provides for approval in three steps:

  • Company discloses BoD comp in advance of the upcoming fiscal year
  • Company submits the disclosed comp to a shareholder vote
  • A majority of shareholders voting need to approve whatever comp is disclosed.

A BoD can design and recommend, in whatever structure and amount it wishes, in whatever detail it wishes, its desired compensation. Unlike in the TSLA settlement, the proposal imposes no requirements on the process that a BoD must follow to design that compensation. It’s a pure vote on whatever the BoD wants it pay itself.

The TSLA settlement excludes directors from voting, as shareholders, on their own pay. It prevents CEO Musk from voting his 13% of TSLA shares in favor. The bylaw amendment can include this. It makes the shareholder vote even cleaner, so directors absolutely cannot approve their own pay.

Suppose a company loses the vote? A few companies asked us what happens then. Aside from the obvious problem that it must have performed badly enough that shareholders don’t want to pay the directors, we can think of a few choices.

  • Directors serve without pay, which is not as crazy as it sounds; executives almost always serve on a BoD without pay, employees of company shareholders frequently decline director pay, and some activists compensate independent directors themselves.
  • Re-do the disclosure and vote with a revised pay plan that can win shareholder approval.

We rather like the idea of a shareholder vote with this kind of impact. It should gain the attention and loyalty of directors quite well.

What’s next?

We wrote a brief explanation of the proposal and why it makes sense in this year’s Proxy Preview.

We submitted the proposal at 12 companies. Two already indicated they will include it on the AGM agenda and in the proxy statement. We will update everyone as companies publish their proxy materials.

Of course, amending bylaws is frequently difficult, as many have supermajority voting rules for shareholders to amend bylaws. (The 12 companies all follow a simple majority rule.) We talked to a few shareholders that object to a bylaw amendment, and instead timidly prefer a precatory proposal. Or, some of them want only an advisory vote on director pay, rather than a binding one. These shareholders might wish they had this bylaw term in place when one or another portfolio company develops some of the corp gov headaches that we see at TSLA.

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