Corporate governance watch: vote failures signal investor dissatisfaction with executive pay

May 10, 2012
By Alex Lee

NEW YORK, May 10 (Business Law Currents) – Stockholders are making their discontent heard through say-on-pay votes that have not been flattering to executives. So far this year, multiple companies have outright failed these votes and even more have not been able to reach the 70 percent approval threshold. In light of Institutional Shareholder Services’ (ISS) 2012 Corporate Governance Policy Updates, evaluations of company pay policies are in line for even greater scrutiny.

According to ISS, a majority vote that does not reach at least a 70 percent approval rate is considered as a failure. A simple majority alone is no longer deemed a mandate of a board’s policies, and any approval level below 70 percent is now perceived as a serious exhibition of shareholder dissatisfaction.

Recently, in a less than glowing endorsement of executive pay levels, only 56.7 percent of stockholders voted in favor of approving compensation at NYSE Euronext. A significant 42.8 percent of stockholders voted against approval of executive pay. The annual meeting results highlight the growing unease with which stockholders are viewing NYSE Euronext’s executive pay policies.

There may be larger structural issues at play for NYSE Euronext, as not only did they say-on-pay vote go poorly but Ricardo Salgado, a member of the company’s board, resigned after not receiving a majority of the votes cast. He was only able to obtain 46 percent of the votes and, per the company’s bylaws, tendered his resignation to the board. There may have been strong sentiment that Mr. Salgado had relegated his NYSE Euronext board duties in favor of increasing his concentration on efforts to help stabilize Portugal’s banking sector.

The pain has been spread throughout the markets with companies in a myriad of industries with differing sizes falling by the wayside. In a massive exhibition of disapproval for a financial institution behemoth, Citigroup failed to reach the desired 70 percent level by a wide margin, managing only a lowly 45 percent approval rate.

KB Home was another casualty of stockholder disapproval of executive compensation. KB Home crossed the finish line with a mere 45.6 percent approval level. This level of shareholder dissatisfaction is a likely reflection of the relatively poor financial performance of the company leading up to the vote. In the current environment, where shareholder value maximization is king, voters may show even less patience than in previous years.

According to GovernanceMetrics International, 38 Russell 3000 companies failed say-on-pay votes through October 2011. So far this year, there have already been five failures. It is interesting to note that voters appear to be showing signs of actively wanting to engage say-on-pay issues. In the case of NYSE Euronext, abstentions only accounted for 0.5 percent of votes.

ISS has ramped up the pressure by stating that it will be evaluating recommendations on say-on-pay proposals on a case-by-case basis in situations where a company does not reach the 70 percent threshold, with increased focus on disclosure to help remedy any issues at large.

Many analysts have eagerly anticipated the results of say-on-pay votes this year. With ISS’s new governance policy updates and shareholder activism lining up in the same direction, it is no surprise that investor dissatisfaction is reaching epic levels. Companies are having their executive compensation policies put under the microscope and unless they are seen to engage shareholders more actively and increase financial performance, the mutinies could increase greatly in the coming months.

(This article was first published by Thomson Reuters’ Business Law Currents, a leading provider of legal analysis and news on governance, transactions and legal risk. Visit Business Law Currents online at

No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see