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Say on Pay – pro or con good governance?

Say on Pay – pro or con good governance?. Presentation at the ecoDa/IFC Roundtable, Brussel 2013-12-17 Per Lekvall The Swedish Corporate Governance Board. Brief update on background and current status

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Say on Pay – pro or con good governance?

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  1. Say on Pay – pro or con good governance? • Presentation at the ecoDa/IFC Roundtable, • Brussel 2013-12-17 • Per Lekvall • The Swedish Corporate Governance Board

  2. Brief update on background and current status • Say on Pay = “The vote of shareholders at a general meeting on the policy and/or various components of compensation of executives and/or non-executives, depending on the country.” (IFA report, Nov. 2013) • Originally conceived by the Cadbury Commission, the concept was introduced into the EU CG agenda through the European Commission’s Recommendation of 2004 on remuneration of directors in listed companies • Since then implemented in a variety of versions in many EU Member States and other parts of the world (cf. IFA report). Examples of variations include: • ex ante policy/ex post report • including/excluding non-executive directors • voluntary /mandatory vote • binding/advisory decision • and others... • Expected to be implemented throughout the EU through the upcoming new Shareholders’ Rights Directive, due before the end of the year: • Part of a broader agenda to encourage shareholder engagement in their investee companies • But also to increase transparency of executive compensation

  3. Is Say on Pay good for governance? PURPOSES / ALLEGED ADVANTAGES e.g. • Giving the shareholders control of overall prihciples for executive remuneration, thus tilting the balance of power more in favour of the shareholders • Gives shareholders incentives to get more involved in the governance of companies QUESTION MARKS / POSSIBLE DRAWBACKS e.g. • Deprives the board of one of its most powerful instruments for carrying out its fiduciary duties to the shareholders – i.e. to hire/fire and remunerate management • Who can be held accountable for bad remuneration decisions by the AGM? • “Upward delegation” from the board to the AGM does not necessarily imply better corporate governance

  4. Conclusions • In jurisdictions where shareholder power is weak and shareholder engagement generally in short supply: • SoP may well be a suitable cog in the wheel towards empowering shareholders and incentivize them to engage in the governance of companies • In jurisdictions with strong shareholder power and little general lack of shareholder engagement: • The drawbacks may well override the advantages, leading to worse rather than improved corporate governance standards Therefore a mandatory Say on Pay requirement should not be implemented indiscriminately across the EU

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