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July 31, 2008 Forum Report:

Inviting Comments on Draft of Gordon Paper about “Say on Pay”


For a revised version of the draft reflecting comments and Forum discussions of Professor Gordon's evolving views, including the proposed "opt-in" alternative he introduced at the Forum's December 2008 meeting, see

For an earlier revision of the initial draft, incorporating refinements prior to Professor Gordon's proposal of his "opt-in" alternative, see


See comments:

John C. Wilcox, August 1, 2008

Cornish F. Hitchcock, August 4, 2008

Leonard Rosenthal, August 5, 2008

Peter C. Clapman, August 5, 2008

C. William Jones, August 10, 2008

Timothy Smith, August 18, 2008

Louis M. Thompson, Jr., August 19, 2008

Richard V. Smith, August 20, 2008

Bess Joffe, September 2, 2008

Brian P. Hillery, October 11, 2008

See also

October 16, 2008 Forum Report:

Summary of Open Meeting Discussions



Forum Report

Inviting Comments on Draft of Gordon Paper about “Say on Pay”

Jeffrey N. Gordon, Alfred W. Bressler Professor of Law at Columbia Law School and Co-director of Columbia’s Center for Law and Economic Studies, has invited comments from Forum participants on his draft of a working paper that addresses the issues being considered in our new program for reconsidering “Say on Pay”:

  Jeffrey N. Gordon, Columbia Law School, July 30, 2008 draft: “‘Say on Pay’: Cautionary Notes on the UK Experience and the Case for Muddling Through” (18 pages, 458 KB, in PDF format)

As you’ll see, Professor Gordon provides a carefully considered review of the evolution of corporate governance theories and practices during the past several decades, generally and particularly in relation to executive compensation, and then examines the potential US marketplace implications of recent UK experience with their required shareholder advisory voting on a “Directors Remuneration Report” (DRR) for each listed company.  Addressing the UK experience, these are some of his observations (pages 14-15):

The efficiency effects of the UK system are potentially a matter of concern.  …the workings of the system seem ill-suited for a dynamic environment.  For example, immediately upon adoption of the DRR regime, the ABI and the NAPF adopted “best practices” of compensation guidance.  Because of the dominance of those two actors, whose institution investor members own 30% of the shares of large UK public firms, the annual shareholder vote is often a test of “comply or explain” with those guidelines.  Indeed, an alternative approach, in which shareholders would annually evaluate firm compensation practices in light of the firm’s performance and prospects as a whole, would be very costly.[55]  The tendency for firms to “herd” in their compensation practices is very strong:   Follow the guidelines, stay in the middle of the pack and avoid change from a prior year, when the firm received a favorable vote. Yet what is the normative basis for giving authoritative weight to the guidelines, whose conventional wisdom has not itself been tested for performance-inducing effect?

…The guidelines may be “correct” in their outcome in particular instances of compensation form, but it is hard to believe that they will persistently produce a result similar to arms’ length bargaining, if that is the ultimate comparator.  More concerning, the implementation of the guidelines may transmit a particular form of compensation practice across an entire economy.

Deviations from the guidelines require, as a practical matter, a consultation with the proxy adviser of one of the institutional groups, either RREV or IVIS. To do otherwise may be to risk a negative recommendation on the advisory vote.  There are no studies on the bureaucratic capabilities or expertise of either proxy advisor.  The system as a whole seems to tilt toward stasis rather than innovation in compensation practices.  Perhaps this is wise.  In light of the generally greater shareholder power in the UK, it does, however, seem ironic that the implementation practicalities of “say on pay” may reduce the freedom-in-fact of the shareholders’ bargaining agent.


55 See Kristin Gribben, U.K. Investors Warn U.S. About Say on Pay, Agenda (Nov. 12, 2007) (citing experience of UK fund managers, who nevertheless want to retain the advisory vote).

After reviewing the significant differences between UK and US marketplaces, the paper offers the following view of how legislated “Say on Pay” would work in the US (pages 16-17):

Only a relative handful of the large public pension funds have independent corporate governance expertise to guide their share voting, and even the largest and most experienced of these, CalPERS and TIAA-CREF, depend on guidelines that they fashion with only limited company-specific accommodation.  Most of the rest simply delegate most of the substantive decisionmaking in the governance area to a proxy services firm, in particular Institutional Shareholder Services (ISS), now part of RiskMetrics.[58]

Like ABI and NAPF, ISS will establish guidelines on compensation; indeed, such guidelines already exist.  As in the UK, firms that do not want to stir trouble will herd. Or firms with alternative ideas will engage ISS in negotiation – but the numbers of firms and the time for serious engagement could easily make the situation untenable.  The propensity of many U.S. institutional investors to delegate such decisions could well give power to a handful of proxy service firms to make substantively very important decisions with potentially economy-wide ramifications.  Indeed, the economy-wide embrace of stock options in the 1990s resulted in part from institutional investor pressure on firms to adopt this “best practice” way to enhance managerial incentives.[59] Then favored accounting treatment established “plain vanilla” options as the “best practice” implementation. In other words, much of what we now regret was the result of prior standardized practice that guidelines epitomize.[60] It is clear that legislated “say on pay” in the U.S. is one way to catch and stop the bad-behaving outliers. But there are costs and risks that cannot be ignored.  


58 See Stephen J. Choi & Jill E. Fisch, On Beyond CalPERS: Survey Evidence on the Developing Role of Public Pension Funds in Corporate Governance, 61 Vand. L. Rev. 315 (2008).

59 Gordon, Independent Directors, supra note 1, at 1529 n. 257.   

60 It is only now, with adoption of FAS 123R, that firms may feel free to experiment with alternative stock option forms, such as performance triggers for grant or vesting, possibly using industry indices to measure performance.  Yet the concerns about valuation of tailored instruments for accounting purposes may have its own uniformity pressure.

Finally, Professor Gordon’s conclusion, like that of many Forum participants, is to keep an open mind about “Say on Pay” (page 18):

…In a 2005 article I said that the regime launched by the SEC’s CD&A regulation deserved a five year trial before we undertook significant change.[67] Having looked more closely at the UK “say on pay” regime, I am prepared to reaffirm my prior view.  We need more information about the consequences of the UK system.  And we need more experience about the possible success of present compensation-reform efforts by shareholder activists at particular firms.  If this is not a satisfactory result from a social responsibility perspective, then the tax code would be a better place to look than adjustment with corporate governance.  


67 See Gordon, Executive Compensation, supra note 20, at 701.

Your comments on paper as well as the issues it addresses will be appreciated.  It should of course be noted that this is a draft and not a published paper, and should be treated accordingly; anyone wanting to refer to its statements should seek permission from its author.

           GL – July 31, 2008


Gary Lutin

Lutin & Company

575 Madison Avenue, 10th Floor

New York, New York 10022

Tel: 212-605-0335






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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