Binding say on pay coming (probably) to France: What a terrible idea

The Daily Mail is reporting that:

Shareholders must set French chief executives' pay in a binding vote that corporate boards cannot ignore, the French parliament decided early on Friday in reaction to a public outcry over Renault chief Carlos Ghosn's giant package. ...

President Francois Hollande pledged to give legal clout to shareholder votes on pay if boards ignored them, which would bring French law on "say-on-pay" into line with other big European countries such as Britain and Germany. ...

The bill is due to go to the Senate in early July.

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.”[1] 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.”[2] 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.

[1] Jeffrey N. Gordon, “Say on Pay”: Cautionary Notes on the U.K. Experience and the Case for Shareholder Opt-in, 46 Harv. J. Legis. 323, 325 (2009).

[2] Id. at 326.

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.”[1] 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.”[2] 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.

[1] Jeffrey N. Gordon, “Say on Pay”: Cautionary Notes on the U.K. Experience and the Case for Shareholder Opt-in, 46 Harv. J. Legis. 323, 325 (2009).

[2] Id. at 326.