In her principal speech during her recent successful campaign to become the United Kingdom's new Prime Minister, Theresa May said a lot of things that as a corporate governance thinker I have very serious doubts about. Ion this post, I look at her views on say on pay:
So as part of the changes I want to make to corporate governance, I want to make shareholder votes on corporate pay not just advisory but binding.
<SARCASM>What a good idea. After all, the nonbinding say on pay rules have worked so well.</SARCASM>
From my book Corporate Governance after the Financial Crisis:
Professor Jeffrey Gordon argues that the U.K. experience with say on pay makes a mandatory vote a “dubious choice.” First, because individualized review of compensation schemes at the 10,000-odd U.S. reporting companies will be prohibitively expensive, activist institutional investors will probably insist on a narrow range of compensation programs that will force companies into something close to a one size fits all model. Second, because many institutional investors rely on proxy advisory firms, a very small number of gatekeepers will wield undue influence over compensation. This likely outcome seriously undercuts the case for say on pay. Proponents of say on pay claim it will help make management more accountable, but they ignore the probability that say on pay really will shift power from boards of directors not to shareholders but to advisory firms like RiskMetrics. There is good reason to think that boards are more accountable than those firms. “The most important proxy advisor, RiskMetrics, already faces conflict issues in its dual role of both advising and rating firms on corporate governance that will be greatly magnified when it begins to rate firms on their compensation plans.” Ironically, the only constraint on RiskMetrics’ conflict is the market—i.e., the possibility that they will lose credibility and therefore customers—the very force most shareholder power proponents claim does not work when it comes to holding management accountable.