‘Say on Pay’ No More?

Two months into Donald Trump’s mandate, it has become clear that the new U.S. President is determined to go ahead with his pledge to roll-back parts of the Dodd-Frank act.

The move will not only mean lower bank costs and capital requirements for financial services players, but also lead to shareholders losing influence over CEOs’ pay packages. For those who gained the right to have a say on such decisions over the past few years this is a concern, and not only in the U.S.

Interestingly, the U.S. move contrasts with a trend we are seeing in the UK — whereby top City investors are beginning to pressure companies and ministers to get tougher on executive pay packages, with some going as far as introducing a proposal to force out the chairs of companies’ boardroom pay committees if a big minority of shareholders fail to back their annual remuneration plans.

A Financial Times article published last year shortly after Trump’s election victory, stated that scraping Dodd-Frank would reduce the leverage institutional investors have over corporate boards.

At a time when news items on shareholders’ revolt against management rewards make headlines across the world on a weekly basis, it is not outlandish to think that there will be resistance amongst shareholders to let go of the option to ban ‘reward failure’ proposals made by companies’ management teams.

Dodd-Frank’s say-on-pay rule introduced in 2011 allows shareholders of public traded companies to weigh in on executive compensation at least every three years. A similar rule also exists in the UK since 2013. To remove it, would mean a change in the engagement between companies and investors.

Above all, it would also mean that by pure shareholder pressure the say-on-pay option could stay in place even if Dodd-Frank itself is repealed. As Jon Lukomnik, from the Investor Responsibility Research Center Institute in New York, cautions: ‘proxy advisory firms could propose that clients vote against directors at companies without say-on-pay’ before adding that ‘a company that withdraws it is going to make itself a target’.

It is forecast that 2017 will be a year when several of the world’s most powerful shareholders will take tougher action on excessive bonuses for company bosses — a move that reached a five-year high in 2016.

With such cranked up pressure and a demand for greater transparency, Dodd Frank’s say-on-pay might be no more, but the threat of shareholder activism hitting the boardrooms of the corporate world probably also means that, regardless of Trump’s policies, shareholders will not give up ascertaining their rights and force their option to have a say on pay to stay put.