Boards & Shareholders
A Trio of Academic Papers for the Real World
By Stephen Davis and Jon Lukomnik that not only do investors vote rationally the submission of shareholder proposals
Compliance Week Columnists with respect to how companies perform, that specifically target the design of the
but that the level of investor approval for compensation packages (e.g., suggesting
W e both live in two worlds: The
workaday reality of investing,
and the sometimes-rarified air of aca-
a board can also provide hints to future
corporate actions.
The other big reform pending in
performance-based equity grants). They
result in an average $2.3 million decrease.
As the authors write, “Our findings pro-
demia. Often those two realities are dis- Washington is, of course, the proposal to vide support for an advisory say-on-pay
jointed, existing separate and apart as if expand “Say on Pay” advisory votes on vote.” Ferri, by the way, produced with
they were different dimensions in a sci- the compensation report to all listed com- David Maber a deep-dive study into the
ence fiction novel. But every panies, not just those effects of the advisory vote in Britain.
once in a while we’re struck by which have benefited “Say-on-Pay Vote and CEO Compensa-
a little-noticed academic paper from Federal emergency tion: Evidence from the U.K.” was first is-
that offers insights both timely stabilization funds. In sued in June 2008, but the authors updat-
and important to Compliance “Shareholder Activism ed it in March of this year. Bottom line:
Week readers. Recently we and CEO Pay,” Ertimur,
discovered three such pieces Ferri, and Musiu sug-
of research. gest that institutional
The first draft paper exam- investors can affect,
ines what vote totals mean in and have affected, CEO
Uncontested elections
uncontested director elections. Seems like compensation. The study, which exam- generally do not draw much
it would be ho-hum, if not outright bor- ined 134 vote-no campaigns and 1,198
ing. Uncontested elections generally do resolutions about compensation between
attention and for good reason:
not draw much attention, and for good 1997 and 2007, finds that institutional Activist-sponsored contests
reason: Activist-sponsored contests for investors focus their efforts not only on for corporate control, as well
corporate control, as well as coordinated companies where the CEO receives a high
“vote no” campaigns, pack more drama absolute level of pay, but also a high level as “vote no” campaigns pack
and draw more academic scrutiny. By of what they call “excess” CEO pay, or more drama and draw more
contrast, uncontested elections are dull, compensation not explainable by the eco-
pre-ordained contests, with directors nomic factors at the company. In other academic scrutiny.
typically being elected by majorities of 85 words, institutional investors rationally
percent or more. But ignoring the results discriminate and target non-economic
of uncontested elections would be a mis- pay packages. Moreover, those firms tar-
take, according to “Investor Perceptions geted for “vote no” campaigns have higher Say-on-pay produced fewer instances of
of Board Performance: Evidence from Un- excess pay components than those receiv- “pay for failure,” even if it did not reduce
contested Director Elections” by