Shareholder Activism Through Say-on-Pay

Shareholder activism around the world has increased substantially over the last few years (see here and here for recent examples). Empowered shareholders seek to discipline management and voice their dissatisfaction with specific corporate decisions. A particular source of tension between investors and management is executive compensation, which in a number of jurisdictions requires at least non-binding approval of shareholders through a voting process widely known as “Say-on-Pay.” This regulatory framework has encouraged shareholder activism further and caught the attention of the public and media, with market commentators talking about a “shareholder spring”.[1]

In our paper, “The Importance of Shareholder Activism: The Case of Say-on-Pay” we outline Say-on-Pay as a corporate governance mechanism designed to increase shareholder voice and power. Our focus is on providing an overview of the existing academic literature on the topic, offering suggestions for future research and highlighting policy implications related to Say-on-Pay, which is particularly important given the debate about its usefulness to corporate governance.

Say-on-Pay was first introduced in the UK in 2002. Shareholders were expected to cast advisory votes on the executive remuneration arrangements proposed by a firm’s board. In 2013, a new UK regulation made Say-on-Pay votes binding, providing shareholders with the ability to block a firm’s remuneration policy (every three years). A number of countries, including the U.S., introduced similar legislation. Our study highlights substantial differences among these laws, including whether they make Say-on-Pay votes mandatory or voluntary, advisory or binding. Academic studies have argued for and against these differences, taking into account such factors as institutional ownership, cultural attributes, and political processes. In most cases, the laws have been the product of heated debates.

One way to tell whether shareholders view Say-on-Pay as effective in improving corporate governance is to measure stock market reactions to the announcement of its introduction. Evidence shows an overall positive market reaction for firms with weak governance structures (e.g. low quality of the board of directors) and excessive executive pay arrangements. However, academic studies find systematic differences across countries regarding the magnitude and direction of the market reaction. We attribute these differences to several factors, including a number of methodological concerns as well as divergence relating to the “perceived value” of corporate governance across distinct environments.

We also review studies examining the impact of Say-on-Pay votes on executive compensation arrangements and firm decision-making. We highlight conflicting evidence on the effect of voting results on future executive pay arrangements, CEO employment, and corporate policies in general. Furthermore, existing studies show relatively low levels of shareholder dissent on executive pay. We argue that empirical evidence to date is inconclusive as to the effectiveness of Say-on-Pay in increasing shareholder voice. We call for further research on this issue; new studies could provide further insights on the efficiency of Say-on-Pay by incorporating the role of intermediaries (such as proxy advisers) in the voting process and the potential role of stakeholder conflicts in the voting outcome.

We further argue that there is a need to extend existing research on what we call the “intended” consequences of Say-on-Pay on firm value and corporate governance. We claim that there is great scope for expanding Say-on-Pay analysis to more countries (and in particular non-Anglo-Saxon ones) and for conducting comparative studies related to its role for corporate governance and its importance for shareholders. It would also be interesting to conduct further analysis on the adoption process of Say-on-Pay and the role of potential resistance against its introduction by, for example, managers or certain types of investors. The underlying causes of such resistance could offer insights on the voting outcomes and the impact of Say-on-Pay on the value of firms.

We also contend that the unintended consequences of this corporate governance mechanism remain relatively unexplored. Given the potential impact of shareholder dissent on managers’ careers, we encourage new studies on the impact of the introduction of Say-on-Pay on the managerial labor market. Firms with a history of shareholder revolts over executive pay issues may have problems attracting talented managers. It is also plausible that managers and other board members whose proposals have repeatedly received negative votes might find it difficult to secure lucrative employment in other companies. Say-on-Pay adoption can also seriously affect CEO decision making, with wider implications for firm performance. For instance, firms might consider transferring their headquarters to countries that have not introduced mandatory Say-on-Pay voting (or similarly restrictive regulations) to protect against potential shareholder revolts or pressure for possibly inefficient contracting.

Overall, our study provides interesting insights on Say-on-Pay. Outside of academia, we believe that our analysis can be relevant for investors, managers, and regulators alike. Despite an upsurge in shareholder activism (much of which is related to shareholder dissatisfaction with executive pay), Say-on-Pay could improve communication between investors and company management. Our study provides a number of suggestions on how that level of engagement can be enhanced further and, overall, highlights the importance of Say-on-Pay for corporate governance.


[1]Burgess, K. & McCrum, D. 2012. Boards wake up to a shareholder spring. FT Group. Available at

This post comes to us from Professor Konstantinos Stathopoulos at the University of Manchester’s Alliance Manchester Business School and Professor Georgios Voulgaris at the University of Warwick’s Warwick Business School. It is based on their recent article, “The Importance of Shareholder Activism: The Case of Say-on-Pay,” available here.