A Trio of Academic Papers for the Real World

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					 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 
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