In the paper, “Management Influence on Investors: Evidence from Shareholder Votes on the Frequency of Say on Pay”, which was recently made publicly available on SSRN, my co-author (David Oesch of the University of St. Gallen) and I examine the peculiar non-binding shareholder votes  required by the Dodd-Frank Act on the frequency of Say-on-Pay (SOP) votes (with a choice between every 1, 2, or 3 years).  Our purpose is to obtain a direct estimate of management’s influence on investors. We also investigate whether management influence varies across firms and whether there is evidence of strategic use of management influence. The empirical setting we identify is particularly useful for our purposes because it exhibits variation in management recommendations, which are usually the same across all firms (in favor of management proposals and against shareholder proposals), thereby allowing us to estimate the extent of management influence. In contrast, proxy advisors’ recommendations were the same across all firms (in favor of an annual SOP vote).

We begin our empirical investigation by showing that at 61.6% of S&P 1500 firms, management recommends an annual SOP vote and that at 35.4% of S&P 1500 firms, management recommends biennial or triennial SOP votes (biennial recommendations are rare). Management is more likely to recommend triennial SOP votes when the percentage of votes controlled by insiders is higher and the percentage of votes controlled by institutional investors (particularly those who had publicly expressed a preference for annual SOP votes) is lower. We interpret this evidence as consistent with the notion that management takes into account the expected voting outcome when deciding on a frequency recommendation, because ignoring an adverse vote is costly. We also show that there is no significant relationship between the duration of compensation and the likelihood to issue a triennial recommendation, in contrast to arguments publicly used by management when motivating their support for a triennial frequency.

With respect to the voting outcomes, we find that the annual frequency option is supported by 75.5% of the votes cast on average and is the most supported option at more than 90% of sample firms. Management recommendations emerge as a key driver of the voting outcome. Estimates obtained from multivariate regression analyses suggest that a management recommendation for a triennial frequency is associated with 25.9% more voting support for a triennial frequency. This figure is close to estimates of the influence of the most prominent proxy advisors, Institutional Shareholder Services. Also, we conjecture that this figure is potentially a lower bound estimate of management influence because many institutional investors favored annual SOP votes, and that in other settings where more votes are “in play”, management influence could be even stronger.

Management influence is not the same across firms and varies systematically with shareholder concerns about executive compensation and with management performance, suggesting that management credibility is an important determinant of management influence of voting outcomes.

Next, we track the actual SOP frequencies that firms adopted in the aftermath of the SOP frequency votes. Even though the votes were non-binding, virtually all companies decided to adopt the SOP frequency supported by the most votes, providing yet another example of the growing influence of non-binding shareholder votes on corporate governance. We also analyze whether firms adopting a triennial frequency – and, thus, facing the next SOP vote in 2014 only – were less likely to make changes to their compensation practices in response to unsatisfactory SOP votes compared to firms adopting an annual frequency (facing the next SOP vote in 2012 already). Using a sample of companies with significant shareholder votes against SOP in 2011, we show that 67.5% of annual adopters made changes to their compensation plan in response to the 2011 vote. On the contrary, only 14.3% of the triennial adopters made similar changes. Additional tests suggest that this difference cannot be explained by the generally lower responsiveness of triennial adopters or the lower SOP voting dissent experienced by triennial adopters. Our evidence of lower responsiveness by companies adopting triennial SOP votes is consistent with the view (expressed by many supporters of annual SOP votes) that a triennial vote reduces management accountability. Furthermore, it also suggests that management may have used its significant influence over shareholder votes to reduce scrutiny over executive compensation via a less frequent SOP vote.

The full paper is available for download here.