DODD-FRANK'S SAY ON PAY: WILL IT LEAD TO A GREATER ROLE FOR SHAREHOLDERS IN CORPORATE GOVERNANCE?

"Say on pay" gives shareholders an advisory vote on a company's pay practices for its top executives. Beginning in 2011, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) mandated such votes at public companies. The first year of say on pay under the new legislation reflects a change in the dialogue and give-and-take in the shareholder-management relationship, particularly on the question of executive pay. We study the evolution of shareholder voting on say on pay-beginning in 2006 as a fledgling shareholder movement to get say on pay on the corporate ballot; then evolving with a handful of companies and later the financial firms conducting say-on-pay votes as they received Troubled Assets Relief Program (TARP) funds; and finally leading to Dodd-Frank's extension of the process to all public companies. Using results from an empirical analysis of data from the pre-Dodd-Frank period, we project that the new mandatory management-sponsored say-on-pay proposals will attract strong shareholder support at most companies, while poorly performing companies with high pay levels can expect shareholder dissent. Early results in the first year post-Dodd-Frank confirm these projections. Our empirical analysis of the pre-Dodd-Frank data supports the potential importance of third-party voting advisory recomrnendations-particularly those by Institutional Shareholder Services (ISS)-on executive pay proposals. The raw data show a 20% swing in shareholder support for management say-on-pay proposals associated with a negative ISS recommendation. However, once we take into account the different recommendations issued by management and ISS, the net effect of a negative ISS recommendation on the overall shareholder vote is relatively small at most companies. Nevertheless, the early Dodd-Frank results show that all thirty-seven companies that failed to obtain majority support in these advisory votes had received negative ISS recommendations. The early results also show that companies that initially received negative say-on-pay recommendations by ISS often modified their disclosure filings or changed their pay practices. This may indicate a growing role for shareholders in influencing executive pay practices and corporate governance more generally.