As the debate about excessive executive pay continues, just why is it that so few shareholders vote against board proposals on pay deals?
Research by Konstantinos Stathopoulos, together with Georgios Voulgaris from Warwick Business School, sheds important light on this issue. Their research has shown that shareholder investment horizons have a significant impact on Say-on-Pay voting patterns. Say-on-Pay is an important corporate governance mechanism which was first introduced in 2002 and mandates an advisory shareholder vote on the executive pay arrangements proposed by the board of directors.
The study finds that short-term investors are more likely to avoid expressing opinion on executive pay proposals and cast abstaining votes, which weakens the efficiency of this corporate governance mechanism. These investors only vote against board proposals where the CEO already receives excessive pay levels.
Says Stathopoulos: “We present strong evidence that shareholders’ investment horizon explains the low levels of shareholder voting dissent. These findings are consistent with prior evidence on the lack of engagement from short-term investors.”
The study also found that long-term investors are more likely to cast a positive vote to the proposed remuneration report. Stathopoulos says this appears to be due to effective monitoring and engagement prior to the publication of the report and not due to collusion with managers. “The existence of long-term shareholders in a firm makes excessive CEO pay less likely. This result, together with our finding that the average institutional investor in the UK has a long-term investment horizon, helps explain the low levels of shareholder voting dissent observed in prior studies.”
The research comes at a time when reports suggest the UK government is about to get tougher with excessive corporate pay, calling on companies to set pay policies that more explicitly limit base salary increases for CEOs.