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The article below was published in Agenda, a Financial Times private subscription newsletter for corporate directors, and is presented with permission.


Source: Financial Times Agenda, July 7, 2008 article





Article published on July 7, 2008
By Kristin Gribben

As “say on pay” has become a more politicized and activist initiative, many mainstream investors and governance professionals are turning against the concept after initially supporting it.

Former supporters don’t like the way the movement is developing. One concern is that it will hurt dialogue between shareholders and companies. Another is that the initiative won’t go far enough to hold compensation committees accountable.

Rick Smith, senior vice president and executive compensation practice leader at Sibson Consulting, is concerned that say on pay has become too politicized and that there isn’t enough information to know what its impact will be.

“It’s gone from a boardroom discussion now to something they’re talking about making mandatory,” he says.

Instead of say on pay, several individuals now support voting against comp committee members to send a message about executive pay practices.

Say on pay, or advisory voting as it was called at the time, was first introduced in the U.S. corporate governance community during an open forum of investors, corporations and analysts in December 2006. It was brought up as part of a broader conversation of board-shareholder communications as a way to bring about collaboration, according to Gary Lutin, the moderator of the forum and an investment banker by trade.

About half of the 30 or so people in the room at that December meeting had never heard of advisory voting. But the idea quickly caught on, Lutin says. “The thing that was really remarkable was virtually everyone in the room thought it was a good idea. But the concept of advisory voting as it was brought up in December was a process for cooperative communication for cooperative interests,” he says.

That quickly changed as shareholder activists latched on to the concept. Shareholder groups like Afscme formed another, this time closed, working group and filed dozens of say-on-pay proposals in time for the 2007 proxy season. During that time, other governance professionals, such as Stephen Davis of Yale University’s Millstein Center for Corporate Governance and Performance, recommended legislative adoption to the House Financial Services Committee. Many original advocates of advisory voting in December, including the U.K. investor group Hermes, were opposed to say on pay’s mandatory application and surprised by the direction the initiative was taking.

This proxy season has seen some progress for say on pay. Eight companies have adopted the measure. H&R Block became the latest, announcing its adoption along with a host of other governance changes last month. But support levels for the proposals have remained flat and some prominent supporters of say on pay have come out in opposition lately.

Broc Romanek, former assistant general counsel of Lockheed Martin and editor of, for one, originally thought say on pay was a good idea but has rethought that as more information has come to light. In the U.K., where shareholders have a nonbinding advisory vote on pay, most executive pay packages are approved, he says: “If say on pay becomes a reality, it’s likely 99% of pay packages get an affirmative vote and comp committees will think they’re doing OK.” The measure will also give comp committees more legal cover against egregious pay packages to show they had the backing of shareholders, he adds.

Another widely expressed concern is that say on pay would increase investor dependence on proxy advisory firms. It would be nearly impossible for investors to sift through all of the Compensation Discussion and Analysis sections of the proxies on their own, so they will be relying largely on the recommendations of proxy advisory firms, says Ken Bertsch, executive director of corporate governance for Morgan StanleyInvestment Management. Bertsch says he has concerns about whether proxy advisors or money managers are ready for say on pay. Morgan Stanley tended to support say-on-pay resolutions last year but has reversed that this year, generally voting against them.

It’s uncertain what the future holds for say on pay in the U.S., particularly as former supporters back away. Presumptive presidential nominees John McCain and Barack Obama both support say on pay in principle. Romanek doubts there will be widespread corporate adoption without a mandate.

With questions unanswered about the viability of say on pay, a new forum is being established, sponsored by the same group that led the original advisory voting forum. The new format, Lutin says, will “focus on the essential purpose of compensation: to reward competitive success.”

Say on Pay in the U.K.







This Forum program is open, free of charge, to anyone concerned with investor interests relating to shareholder advisory voting on executive compensation, referred to by activists as "Say on Pay." As stated in the posted Conditions of Participation, the Forum's purpose is to provide decision-makers with access to information and a free exchange of views on the issues presented in the program's Forum Summary. Each participant is expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

The organization of this Forum program was supported by Sibson Consulting to address issues relevant to broad public interests in marketplace practices, rather than investor decisions relating to only a single company. The Forum may therefore invite program support of several companies that can provide both expertise and examples of performance leadership relating to the issues being addressed.

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