On Wednesday, 28 July 2010, the event series „Forum Unternehmensrecht“ of the Center for Business and Corporate Law discussed, welcoming renowned speakers, the following highly topical corporate governance issue: „Say on Pay“ – a term that covers rules, recommendations and other mechanisms that promote, allow or impose that the remuneration policy of board members is regularly submitted to an express vote at the shareholders meeting.
This time, „Forum Unternehmensrecht“ received Prof. Paulo Câmara, Assistant Professor at the Catholic University of Lisbon Faculty of Law, at the Portuguese Securities Law Institute (IVM) and at the Instituto Superior de Economia e Gestão (ISEG), as well as Dr. Carsten Jungmann, LL.M. (Yale), M.Sc. in Finance (Leicester), Senior Research Assistant at Bucerius Law School in Hamburg and Visiting Professor at Ludwig-Maximilians-University in Munich, both speakers with an extensive experience and academic background.
Firstly, Prof. Câmara gave a critical and comparative analysis of „Say on Pay“ in Europe and the United States where „Say on Pay“ legislation arose in recent years mainly in response to the crisis. Prof. Câmara explained that several „Say on Pay“ rules (e.g. in the UK, in Germany, in the Netherlands and in Portugal), although with different content and diverse scope of application, resulted from an endeavour to ensure that the level and the structure of remuneration policy was consistent with the long-term performance of the company, and that the remuneration of directors aligned interests of directors and shareholders.
On this basis, Prof. Câmara pointed out the purposes of „Say on Pay“ mechanisms which he illustrated namely in the example of the United States where the Restoring Financial Stability Act of 2010 had introduced „Say on Pay“ as a result of the financial crisis. According to Prof. Câmara these purposes have to be seen in a legitimacy function, a transparency function and a best practices promotion function with „Say on Pay“ being, in theory, apt to prevent or discourage compensation excess or irregularities and to promote best practices.
In a further step, Prof. Câmara identified the different models of „Say on Pay“ in Europe and the United States, depending upon whether the shareholders’ vote was binding (e.g. as in Sweden) or non-binding. Going into the particularities of each single country, Prof. Câmara gave an overview of the „Say on Pay“ mechanisms operative in countries where the shareholders’ vote was non-binding and as such of a purely advisory nature as in the UK or in Germany. Finally, he pointed out that the concrete role of „Say on Pay“ mechanisms varied according to the governance structures in place in the respective jurisdiction.
Prof. Câmara then focused on the core question whether „Say on Pay“ policy effected a real change in the operations, accountability or risk management of a company. As Prof. Câmara demonstrated, empirical evidence showed that, in general, „Say on Pay“ had not impeded an increase of pay levels of board members of the concerned companies and seemed to be rather ineffective. On the basis of this evidence Prof. Câmara doubted whether „Say on Pay“ accomplished the purpose of promoting best practices in reducing compensation excesses or aligning the interests of shareholders and executives.
Subsequently, Dr. Jungmann, LL.M., M.Sc., concentrated on the “Say on Pay” model operative in Germany where in 2009 the Act on the Adequacy of Executive Remuneration (VorstAG) had introduced a non-binding, advisory shareholder vote and the German Corporate Governance Codex had been amended in 2010. He pointed out that a „Say on Pay“ resolution of the shareholders - whether approving or refusing the remuneration system - had no legal consequences. However, he argued that there were non-legal, de facto consequences in that way that „Say on Pay“ lead to a higher awareness and sensibility for compensation questions among the members of the Supervisory Board and potentially among the shareholders. Furthermore, it gave a more accurate picture of the acceptance of the respective remuneration system. Dr. Jungmann, LL.M., M.Sc., emphasized that by means of „Say on Pay“ the chance of a company using remuneration schemes in granting „rewards for failure“ or encouraging excessive risk taking was at least lower. From his point of view, „Say on Pay“ mechanisms could therefore not be considered as unneccessary. The discussion resulting therefrom deepened the question of whether retaining „Say on Pay“ mechanisms made sense.
For further information, please see:
· Gordon, “’Say on Pay’: Cautionary Notes on the UK Experience and the Case for Shareholder Opt-In”, Columbia Law and Economics Working Paper No. 336, available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1262867
· Bainbridge, “Is ‘Say on Pay’ Justified?”, Regulation (Spring 2009), available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1452761
· Ferrarini/Moloney/Ungureanu, “Understanding Directors' Pay in Europe: A Comparative and Empirical Analysis (2009)”, ECGI Law Working Paper No. 126/2009 (2009), available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1418463
· Cheffins/Thomas, “Should Shareholders have a Greater Say on Pay? Learning from the US Experience”, Vanderbilt University School of Law Research Paper 01-06 (2001), available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=294621