What next, as SEC adopts 'say on pay'?

The controversy seems a little odd, from a European vantage point, where in several countries shareholders already have a right to vote on the pay policies of companies. As in the UK, those votes are mainly non-binding: companies don't have to accept shareholders' opinions on them, even though they do on a lot of other matters. In the US, however, almost all shareholder votes are non-binding and even director-elections are de facto non-binding as you cannot vote against a director. But at the end of January, the US Securities and Exchange Commission voted to require companies to give shareholders a "say on pay" and on the so-called "golden parachutes" that executives received when ejected from the pilot's seat after a takeover bid or other dismissals not-for-cause. The SEC was divided, along party lines, on the vote, with the Democrats winning the day. Shareholder meetings of larger companies happening on or after January 21 this year will have to let shareholders decide whether to have such votes every year, every two years or every three. Smaller companies won't have to comply for another two years. "I believe that this two-year deferral is a balanced and responsible way for the SEC to ensure that its rules do not disproportionately burden small issuers," said SEC Chairman Mary Schapiro. But it was this inclusion that led to the split. The Republicans wanted small companies excluded altogether. Schapiro said the two-year deferral would enable the SEC to adjust the rule if appropriate before it smaller issuers have to comply.

So far so slow. The enhanced disclosure of executive pay, pioneered in the US and now widely required by law and regulation in countries around the world, has done little to halt the upward spiral of top-management pay. If anything, it may have accelerated it, as a variety of academic analyses have concluded. Having a public vote on policy may embarrass a board into modifying its stance or thinking twice before proposing something likely to stretch the limits. Coupled with the end to broker-voting of shares held on account, shareholder activists could get a larger voice and more to shout about. But turnout will fall, putting the legitimacy of shareholder votes in doubt. When brokers were allowed to vote shares on behalf of silent clients, the legitimacy was anyway in doubt. But the percentages voted at least looked half-way legitimate. And now?

The bigger question is the disconnect between shareholders and the concept of ownership. To be sure, some institutional shareholders operate as if they cared about the companies in which they invest. But the combination of leveraged holdings, high-frequency trading and the ever-expanding layers of intermediaries between the end-beneficiary and the company mean the concept of ownership – let alone of "stewardship" – is strained. In the US it hasn't mattered before. Shareholders had so few rights that ownership wasn't an issue. That's why the activists embraced agency theory and its prescriptions of mechanisms to align incentives in pay with shareholder interest. The manifest failure of those mechanisms demonstrates that boards and directors aren't the machines that the behaviourist (and behaviouralist) thinkers thought they were. Ownership, in any traditional sense, implies accountability in both directions, and that requires dialogue. This say-on-pay, exercised by lobbyists and fly-by-wire traders, will be at best a dialogue of the deaf.

Source document: The SEC news release has a link to the video of the chairman's statement.