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Say on pay around the world.


     A. Say on Pay in the U.S.
        1. Development
        2. Dodd-Frank Requirements
        3. Impact of Say on Pay
     B. U.K. Say on Pay
        1. Early Legislation
        2. The Effects of Nonbinding Say on Pay in the U.K.
        3. New Legislation Implementing Binding Say on Pay
     C. Say on Pay in Australia
        1. Overview
        2. Say on Pay: The Two-Strike Rule
        3. Initial (Mixed) Reactions to the Two-Strike Rule
     D. Belgium
        1. Regulatory Framework for Shareholder Approval of
           Executive Remuneration Arrangements
        2. Assessment of Shareholder Voting Power on Executive
           Remuneration Agreements in Belgium
     E. France
        1. Regulatory Framework for Shareholder Approval of
           Executive Remuneration Arrangements
        2. Assessment of Shareholder Voting Power on Executive
           Remuneration Agreements in France
           a. Voting on Total Board Pay
           b. Strength of Shareholder Voting on Other
              Elements of Executive Pay
     F. Germany
        1. Regulatory Framework for Shareholder Approval of
           Executive Remuneration Arrangements
           a. The Two-Tier Board Structure
           b. Shareholder Approval Requirements for Executive
        2. Assessment of Shareholder Voting Power on Executive
           Remuneration Agreements in Germany
           a. Executive Remuneration in Germany
           b. Results of Shareholder Voting on Executive
     G. Sweden
        1. Regulatory Framework for Shareholder Approval of
           Executive Remuneration Agreements
        2. Assessment of "Say on Pay" in Sweden
     H. The Netherlands
        1. Regulatory Framework of the Dutch Board Structure
           and Remuneration Arrangements
           a. The Two-Tier Board Structure
           b. The One-Tier Board Structure
        2. Executive Remuneration
        3. Assessment of Say on Pay
     I. Summary of Countries' Different Features
     A. Diverse Versus Concentrated Ownership Patterns
     B. The Effects on Executive Compensation of Increased Stock
        Ownership by Institutional Investors
     C. Social Intolerance of Income Inequality
     D. Political Party Enacting the Legislation
     E. State Ownership of Major Enterprises


Shareholders have long complained that top executives are overpaid by corporate boards irrespective of their performance. (1) Traditionally largely powerless to prevent these perceived abuses, investors have sought a way to gain greater influence over directors' compensation decisions. While many governments responded by increasing the level of corporate disclosures on compensation packages and policies, and occasionally tinkering with tax policies in efforts to reduce pay levels, none of these changes has had much impact. (2)

However, investors have continued to put pressure on governments to change the status quo. In 2002, these efforts led the U.K. to adopt legislation requiring public companies to permit their shareholders to have a mandatory, nonbinding vote on the compensation of their top executives ("Say on Pay"). (3) Since that time, there has been a wave of Say on Pay legislation enacted in countries around the world, including the U.S., Australia, Belgium, the Netherlands, and Sweden, with Swiss voters most recently approving a binding shareholder vote on executive remuneration. (4) In this Article, we examine these new legislative iniatives carefully and ask why they have been so widely adopted, how effective they are, and whether they are likely to be adopted in other countries. (5)

What is the justification for adopting these rules? The answer to this question turns in large part on the prevailing share ownership structure of corporations in the country in question. For countries where most corporations have dispersed ownership structures, like the U.S., the U.K. and Australia, proponents have claimed that these votes will allow shareholders to monitor management and thereby reduce the agency costs of the separation of ownership and control in public companies. (6) Advocates argued that institutional investors, assisted by third-party voting advisors, would overcome collective action problems, inform themselves about corporate performance and intelligently evaluate the executive pay packages being proposed by corporate boards. Boards would, in turn, respond by better engaging with their investors and providing them with more information, tie executive pay more closely to performance and show greater restraint in the compensation awards. (7) Opponents of Say on Pay denied that any of these possible benefits would result and instead claimed that the entire effort was misplaced. (8)

In concentrated ownership countries, (9) such as the Netherlands, Germany, Sweden, and Belgium, the story is more nuanced. The existence of controlling shareholders at most companies in these countries means that there already is close monitoring of executive pay levels by a motivated owner. (10) Thus, at first blush, there seems to be little reason for these countries to have adopted Say on Pay voting requirements. However, on closer examination, we find several other reasons for these changes, including: increased ownership dispersion at larger public companies creating a need for a new monitor of executive pay; strong support of such legislation by foreign institutional investors whose ownership interests in EU-based firms has increased dramatically in recent years; social pressures against rising levels of income inequality; political responses by left-leaning parties to these social pressures by the introduction of Say on Pay legislation; and the presence of important state-owned enterprises in some of these countries that give politicians an important role in setting executive pay.

The effects of Say on Pay votes are harder to summarize because they vary across nations. However, several general statements can be made. First, when Say on Pay votes are held, shareholders vote to approve the pay levels, pay composition, and pay policies, at almost all companies by very wide margins. Second, third-party voting advisors, such as Institutional Shareholder Services ("ISS"), pay a crucial role in informing institutional investors about executive compensation practices and packages. These advisors' recommendations for, or against, a company's pay plan may also carry significant weight with their institutional clients, and can dramatically impact the outcome of a vote. Third, Say on Pay's strongest effect has been felt at companies that exhibit poor performance with relatively high levels of pay. (11) Fourth, when companies receive low levels of shareholder support in a vote, directors frequently contact their investors to better explain their policies, thereby giving shareholders greater input into pay issues. Fifth, Say on Pay votes appear to have had little long-term impact on executive pay levels, while research on their impact on shareholder value tends to show a small positive impact, although some studies find no, or negative, effects.

Overall, we conclude that Say on Pay is here to stay. In fact, if the recent experience of the Swiss popular referendum in favor of a binding vote on executive compensation is any gauge, then it seems likely to appear in more countries over time. Thus, in the final Part of this Article, we look at the future of Say on Pay. We hypothesize that if boards continue to increase pay levels over time, then countries with advisory votes will move to make them binding votes. This already has been the case in the U.K. and Australia. Moreover, some legislatures will feel it necessary to impose hard-law regulations on compensation practices, either directly on pay levels and composition as the EU already did and is further threatening to do for banks, (12) or indirectly as the Australians have done by attaching severe consequences to boards' failure to respond to repeated high levels of shareholder dissent in Say on Pay votes. (13)

This Article proceeds as follows. In Part I, we provide an overview of the current state of Say on Pay in the U.S., U.K., Australia, Belgium, France, Germany, Sweden and the Netherlands. Part II distills the experiences of these nations to develop a set of explanatory factors for why Say on Pay legislation has been adopted, or seems likely to be adopted, in these countries. The final Part of this Article contains our predictions about the future of Say on Pay in these and other countries.


While Say on Pay has been the topic of several empirical studies at both the national and international level, many of these papers do not clearly define Say on Pay. This is important because different kinds of shareholder votes coexist and it is a serious mistake to treat them all as equivalent. (14) In our study, we define Say on Pay as: (1) a recurring, mandatory, (15) (2) binding or advisory shareholders' vote, (3) provided by law, (16) that (4) directly or indirectly through the approval of the remuneration system, remuneration report or remuneration policy, (5) governs the individual or collective global remuneration package of the executives or managing directors of the corporation. (17) As we will see, not all countries that permit shareholder votes on executive remuneration issues provide those investors with a Say on Pay vote.

We begin with a detailed discussion of the Say on Pay regimes adopted, or proposed, in eight of the most important industrialized countries in the world: the U.S., the U.K., Australia, Belgium, France, Germany, Sweden and the Netherlands. While there has been some research conducted in the first three countries mentioned, almost nothing has been written about the experiences of the Continental European countries. (18) As a result, much of the statistical evidence that we report on these five countries is derived from data that we have hand collected and put into tables.

A. Say on Pay in the U.S.

1. Development

Say on Pay in the U.S. grew out of precatory shareholder-sponsored Rule 14a-8 (19) proposals submitted to public companies for inclusion on their proxy statements. (20) Beginning in the 2006 proxy season, the American Federation of State, County, and Municipal Employees (AFSCME) started submitting these proposals, which recommended that the corporate boards at the targeted companies give shareholders a nonbinding vote on the companies' pay for their top executives. (21)

These early Say on Pay shareholder proposals were uniformly opposed by management but received significant shareholder support. (22) Management argued that the board of directors, not shareholders, was responsible for setting executive compensation. In their eyes, shareholder input would only impede the board's ability to act effectively. Initially, boards ignored Say on Pay proposals--even those supported by a majority of shareholders. (23)

In 2008, in response to public concerns about the financial crisis, Congress put Say on Pay on its legislative agenda. The Emergency Economic Stabilization Act of 2008 (EESA) required Troubled Asset Relief Program (TARP) fund recipients to provide their shareholders with an advisory vote on the pay for the company's executives. (24) In 2009, the financial stimulus plan continued the Say on Pay requirement for financial firms with outstanding TARP debts. (25)

To implement this new legislation in 2009, the SEC required an advisory shareholder vote on executive pay packages of TARP recipients. (26) During the 2010 proxy season, about 280 financial firms held Say on Pay votes. (27) The EESA mandate increased the number of firms subject to advisory Say on Pay votes beyond those shareholders identified as having "bad" compensation. (28)

The 2010 proxy season saw shareholders at TARP-funded firms vote in support of management-sponsored Say on Pay proposals with an average support level of 88.7%. (29) This high level of shareholder support for executive pay policies is interesting since in 2010 most of the Say on Pay votes were held at financial firms that had fared poorly during the financial crisis.

2. Dodd-Frank Requirements

Advisory Say on Pay for top executives' compensation was made universal for public companies by section 951 of the Dodd-Frank Act. (30) Under section 951, the SEC provided detailed requirements that identify both the form of the Say on Pay proposal and the executive officers whose compensation is subject to a shareholder vote. (31) Say on Pay votes are now required at shareholder meetings held after January 21, 2011 at public companies with a $75 million public equity float or more. (32)

Only the pay packages of a company's executive officers named in the company's proxy compensation table are subjected to the vote. (33) The vote is up or down as to the overall compensation package as described in the Compensation Discussion and Analysis (CD&A) section of the proxy statement, (34) and does not allow shareholders to directly voice an opinion on specific elements of executive compensation (such as bonuses, stock options, retirement pay, performance incentives). (35)

3. Impact of Say on Pay

In the 2011 proxy season, shareholders voted on these management proposals at about 2200 US public companies. (36) The results showed several clear trends. First, shareholders strongly supported existing pay practices at most firms with Say on Pay votes garnering on average 91.2% support. Second, management proposals were voted down only 1.6% of the time, (37) and when that happened it was often based on by pay-for-performance concerns. Third, shareholder votes were highly correlated to company share returns and CEO pay, with low returns and high CEO pay resulting in lower Say on Pay support. Fourth, negative Say on Pay recommendations by third-party voting advisors prompted many companies to modify their disclosure filings or to change their pay practices (sometimes retroactively) to win support. (38)

An important question is what effect Say on Pay voting has had on shareholder value. Several studies attempt to measure this effect. Cunat, Gine and Guadalupe study Rule 14a-8 advisory shareholder proposals from 2006 to 2010 that request that companies permit their shareholders to vote on executive compensation at the firm. (39) They examine the immediate effect on firm stock market returns as well as longer-term effects on CEO compensation, accounting performance, productivity and firm policies. They find that on the day of the shareholder vote, if Say on Pay proposals receive more than 50% shareholder approval, the company experiences an abnormal return of 2.4% relative to one whose vote fails. (40) This study reports that where voting crosses the 50% threshold, there is a 50% higher likelihood of being implemented by the firm in question. (41) Further, firms implementing Say on Pay "have higher growth in earnings per share, return on assets, return on equity and Tobin's Q one year after the vote." (42) However, they find only small effects on executive compensation with a 4% reduction in salary increases. (43) They suggest that Say on Pay "serves to monitor and incentivize CEOs to deliver better firm performance by providing a clear mechanism for shareholders to voice their opinions, as confirmed by major improvements in shareholder value and firm performance among the firms in our sample." (44)

Other empirical research looking at the effect of Say on Pay on firm value uses event studies. One set of studies examines stock market reactions around regulatory events related to enactment of Say on Pay requirements. Ferri and Maber find small, positive price reactions to Say on Pay regulation in the U.K., particularly in firms with excess pay and controversial compensation practices. (45) There are similar findings as to the Congressional adoption of the U.S. Say on Pay legislation, although there is not unanimity on this point. (46) A second set of event studies examines the effect of Say on Pay induced compensation changes on stock prices finding either no stock price reaction (47) or small negative effects. (48)

Another recent study by Iliev and Vitanova examines the announcement of the SEC rules that gave smaller firms an additional two years before being subjected to the new requirement imposed on larger public companies. (49) They find that the announcement of this rule led to a positive 1.5% three day return for firms that were required to hold a Say on Pay vote versus those that were not. (50)

In the eyes of its supporters, Dodd-Frank's mandated shareholder votes have also focused management on shareholders' concerns, increased shareholder participation in corporate governance, and opened lines of communication between management and shareholders (and proxy advisory firms) regarding executive compensation. (51) Management at many companies made changes to the substance and disclosure of their pay programs in an attempt to more clearly align pay to performance. (52) Furthermore, many companies revised the content of the CD&A filed with the annual meeting proxy materials. At many companies whose pay programs received negative Say on Pay recommendations by proxy advisory firms, directors connected with shareholders following an "against" recommendation. (53) Changes in corporate governance behavior--such as more complete disclosure of pay-for-performance policies and the reversal of specific, controversial pay practices--inaugurated by Say on Pay in 2011 continued apace in 2012 and 2013.

B. U.K. Say on Pay

1. Early Legislation

Decades of perceived excess executive remuneration and "rewards for failure" led to the evolution of Say on Pay legislation in the U.K. (54) Effective August 1, 2002, the U.K. became the first country to adopt mandatory nonbinding shareholder votes on director compensation (Say on Pay), through the Directors' Remuneration Report (DRR) Regulations. (55) In 2003, the first year of mandatory advisory votes in the U.K., shareholders at GlaxoSmithKline became the first to vote down their company's compensation report, by the slim margin of 50.72%. (56) Specifically, shareholders objected to an estimated $35 million golden parachute for the Philadelphia-based CEO. (57) Hailing it as a "landmark in corporate governance," "[s]ome British activists think it may mark the moment when British capitalism decided to stop converging with its American counterpart." (58)

However, in the overwhelming number of cases, shareholders vote in favor of management-presented compensation reports. One study suggests less than 10% of shareholders abstain from, or vote against, compensation reports. (59) In fact, between 2003 and 2009, only nine companies had their Say on Pay proposal defeated, and all but the Royal Bank of Scotland and GlaxoSmithKline were relatively small firms. (60) Furthermore, between 2002 and 2007, only sixty-four out of 596 reporting companies received dissent of more than 20%. (61)

2. The Effects of Nonbinding Say on Pay in the U.K.

Since its enactment in 2002, the Directors' Remuneration Report (DRR) regulations have been the subject of much academic scholarship. (62) Generally, empirical studies suggest that no change in the executive pay growth rate occurred after the adoption of the U.K. regulations. (63) However, the "Say on Pay" regulation may have a "moderating effect on the level of CEO compensation conditional upon poor performance." (64) Shareholders dissent more where CEO compensation is above the "average excess compensation" (65) and where pay is not closely tethered to performance. (66) Studies suggest, however, that a board's responsiveness to such shareholder dissent is mixed. (67)

Empirical results further show that Say on Pay regulation "was accompanied by positive stock price reactions at firms with controversial pay practices and, more specifically, practices that weaken penalties for poor performance, consistent with investors perceiving say on pay as a value-creating governance mechanism." (68) This suggests shareholders view the new regulation as a "value enhancing monitoring mechanism." (69)

Even with most reports receiving over a 90% shareholder approval rate, compensation reports attract the single highest dissention rate among shareholders when contrasted with shareholder voting patterns on any other similar proposals. (70) Significantly, votes against DRR exceed those shareholder votes against the reelection of directors of firms. (71)

Studies do seem to suggest that, at the margin, shareholders use their votes on DRR to convey their dissatisfaction with excessive pay practices. (72) One paper by Alissa suggests that shareholders are in dissention when pay and performance are "mismatched." (73) Moreover, the paper recognizes a statistically significant correlation in excess compensation and dissenting shareholder votes. (74) Similarly, the Carter and Zamora study indicates shareholder disapproval is highest when CEO salary is higher, there is weaker pay-for-performance sensitivity in bonus pay, and there is greater potential dilution from stock-based compensation, particularly in stock option pay. (75) Sheehan similarly concludes her U.K. study by noting that "institutional investors use the threat of a negative vote to enforce compliance." (76)

Evidence regarding boards' responsiveness to shareholders' nonbinding votes is mixed. Ferri and Maber found that firms did respond to high shareholder dissention by "removing controversial provisions criticized as rewards for failure, such as long notice periods and retesting provisions for option grants." (77) Furthermore, their study found a "significant increase in the sensitivity of CEO pay to poor performance," especially where firms experienced high shareholder dissention at a first vote and at firms with excess CEO pay before the Say on Pay regulation. (78) Consistent with the other relevant studies, however, Ferri & Maber confirm that after controlling for performance, there is no change in the growth rate of CEO pay. (79)

Providing a somewhat more tempered result, Carter and Zamora indicate, "when given the contractual opportunity ... boards do respond with lower [compensation] increases than other firms." (80) Their paper claims that when executives respond they "curb[] salary increases and dilution from stock option grants" thereby improving CEO bonus PPS links. (81)

While Alissa finds "no evidence for the hypothesis that the board responds to shareholders' dissatisfaction by changing excess compensation," his results do indicate that where CEO excess pay is above the mean, boards respond by reducing excess compensation. (82) Alternatively, the second prong of Alissa's study suggests that boards similarly respond to shareholder pressure and dissatisfaction by "forcing" the CEO out of office. (83) Therefore, this bifurcated test leads Alissa to conclude that boards are responsive to shareholders' votes. (84)

Conversely, the Conyon study shows "little evidence of a relation between CEO pay and shareholder dissent on the directors' remuneration report." (85) Furthermore, the study states no evidence exists that CEO pay is negatively correlated with previous shareholder voting dissent in firm's greater "excess pay." (86) However, Ferri and Maber offer an interesting insight (predicted by many) to rebut this negative view of a board's responsiveness, suggesting that "many firms removed this provision ahead of the vote, presumably in an attempt to avoid voting dissent and consistent with institutional investors' preference for 'bargaining in the shadow.'" (87)

3. New Legislation Implementing Binding Say on Pay

In June 2012, the U.K.'s Department for Business Innovation & Skills released a consultation proposing compensation reporting regulations and implementation of binding Say on Pay in the U.K. for companies with shares on the Financial Services Authority's Official List (88) as well as all U.K. companies listed on the NYSE, the NASDAQ, or with shares listed in another EEA state, beginning in October 2013. (89) Under its auspices, U.K. companies will now be required to put to an annual binding shareholder vote its "director remuneration policy, including its approach to termination payments." (90) If a company fails a binding vote on compensation, "it must continue using the last policy approved by shareholders until a revised policy is approved." (91) The new proposal's expanded disclosure requirements require companies to set out their exit payment approach in the compensation policy report, subject to the binding shareholder vote. (92) This proposal (93) was recently enacted into law. (94)

C. Say on Pay in Australia

1. Overview

Executive pay in Australia grew greatly between 1993 and 2008, showing the largest growth between the mid-90s and 2000. (95) This growth in executive compensation is largely attributable to increases in incentive pay. (96) However, even as Australian pay rates increased significantly, absolute CEO pay level remained well below Australia's peers the U.S. and the U.K., aligning Australia with many smaller European countries. (97)

In response to shareholders' and other market participants' "general unease" about executive pay, the Australian government inserted section 250R (2) into the Corporations Act of 2001 (Cth). (98) This section required a nonbinding shareholder vote on ail listed companies' remuneration reports, at the annual general meeting (AGM). (99)

Professor Sheehan studied the Australian experience during 2005 to 2008 using voting data from 109 companies listed on the S&P/ASX 200. (100) She concluded that the data showed a progressively higher rate of shareholder dissention over the years studied. This is consistent with data in the 2009 Productivity Commission Report, which claims that the global financial crisis was a leading cause of high negative votes at companies. (101)

After the financial crisis, Australia's Productivity Commission reviewed the history and regulatory framework of Australia's executive remuneration regulations, and made several important recommendations. (102) On June 20, 2011, the Australian Senate passed the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Bill 2011, (103) which included substantial changes to prior Say on Pay provisions.

2. Say on Pay: The Two-Strike Rule

An explanatory memorandum, released by the Australian Parliament, weighed the positive and negatives of a nonbinding shareholder vote. The memorandum recognized that nonbinding shareholder votes might provide benefits, such as "increased dialogue between companies and shareholders on remuneration issues." (104) Furthermore, it openly acknowledged evidence that "some boards are responsive to the non-binding vote, and that the opportunity for shareholders to put forward their views is having a positive impact on remuneration policies." (105) Still, the Australian Parliament was uncomfortable with existing legislation that imposed no penalty on nonresponsive boards in the face of a negative nonbinding shareholder vote (except the "nuclear option" of director removal). (106)

Australia similarly recognized significant deficiencies in the alternative--binding shareholder votes. Specifically, the memo noted that binding shareholder votes had the potential to "absolve directors of their responsibility to shareholders" regarding executive compensation, thereby undermining the broad authority of the board to make decisions. It further noted concern that a binding shareholder vote would "affect the competitiveness of Australian companies and their ability to attract and retain top executives." (107) After weighing its options, Australia settled somewhere in between: while resisting moving to a mandatory binding shareholder vote, the new regulations purport to strengthen a mandatory non-binding vote with the "Two-Strike Rule." (108)

The Two-Strike Rule provides shareholders of listed companies an opportunity to "spill the board" if the company remuneration report receives a negative reception at two consecutive AGMs. (109) The "first strike" occurs when a company receives a "no" vote of 25% or more of the shareholder votes cast on its remuneration report. (110) Following a first strike, the company's subsequent remuneration report must explain the board's response and proposed action or inaction. (111)

At the next AGM, upon receiving a second consecutive "no" vote of 25% or more of the shareholders' votes cast on the remuneration report (the "second strike"), the shareholders will be required to vote on a "spill resolution" at the same AGM. (112) This spill resolution will determine whether the company's directors will need to stand for re-election at a "spill meeting." (113) If the spill resolution receives 50% or more of the eligible shareholder votes cast, the separate spill meeting must be held within 90 days. (114) The second strike and the spill resolution were intentionally separated to ensure that shareholders are not discouraged from voting against the remuneration report for fear of director removal. (115)

To ensure the effectiveness of the spill resolution following the first strike, in a company's meeting papers for their next AGM, a company must provide notice of the potential for a spill resolution at that AGM, in case a second strike triggers such a resolution. (116) Furthermore, following a passage of the spill resolution, a company must still provide the minimum notice period required by both the Corporations Act and any self-imposed notice period set out in the company constitution to ensure shareholders' ability to nominate and endorse board candidates at the special re-election meeting (spill meeting). (117)

At the spill meeting, all of the directors, except the managing director, (118) serving "when the resolution to make the directors' report" was considered, must stand for re-election. Furthermore, such directors cease to hold office at that time unless they are re-appointed by the shareholders. (119) However, if a vacating director is re-appointed, their term continues as though it were uninterrupted. (120) Such surviving directors serve the duration of their appointment from the date that they were last appointed to the board. (121) Also, at the spill meeting shareholders will vote on resolutions to appoint persons to the vacated positions. (122)

Section 250X disallows a complete board spill, requiring that at least the managing director and the two people receiving the highest portion of the votes, though not necessarily a majority, remain. (123) If two or more individuals have the same percentage of votes, the remaining director(s) may choose which of the candidates is appointed as a director, but this appointment must be approved at the company's next AGM. (124)

If the spill meeting does not convene by the end of the ninety-day period, each director in office at the end of such period is strictly liable. (125) Section 249CA of the Corporation's Act empowers any director of a listed company to call a meeting of the company's members, thus ensuring every director has the practical ability to avoid the offense. (126) Section 250U has a resetting mechanism that only allows consideration of a spill resolution at every second AGM. (127) This rule applies to remuneration report votes held after July 1, 2011, allowing a spill resolution to be triggered only where both strikes occur after that date. (128)

3. Initial (Mixed) Reactions to the Two-Strike Rule

One year after the enactment of the Two-Strike Rule, 28 (approximately 9%) of ASX 200 companies, (129) and 106 ASX companies overall, (130) received a first strike making them susceptible to a dangerous strike two in the next proxy season. (131) These numbers generated a wide range of responses from commentators with investor groups "warmly welcoming]" the new bill, while the Australian Institute of Company Directors referred to it as a '"heavy-handed black letter law approach' that would produce unnecessary red tape." (132)

A recent survey of the Australian-based law firm Allens Linklaters's listed company clients shows 72% express disapproval of the Two-Strike Rule suggesting "significant (AGM) reform" is necessary, with a majority believing the rule should be scrapped entirely. (133) Similarly, the Sydney-based law firm Mallesons Stephen Jaques publicly renounced the effectiveness of the Two-Strike Rule in an annual publication based on its experience and November 2011 client director surveys. (134) The firm summarizes the common critique of the reform stating:
   The reforms appear to have drawn the attention of boards away
   from matters of greater strategic value to organizations and have
   largely been used as a punitive mechanism by disgruntled
   shareholders frustrated by challenging market conditions, rather
   than as a means of communicating shareholders' assessments of
   executive remuneration. In the words of one survey respondent,
   "the reforms ... only add compliance costs and provide a larger
   voice to activist minority shareholders." (135)

On the other side of the issue, a 2012 Melbourne Institute and Global Proxy Solicitation study indicates 53.2% of shareholders report being "[m]ore ... likely to vote against" a remuneration report this year if their company received a first strike at the 2011 AGM. (136) The same study shows 68.4% of shareholders report being more likely to vote against the board's re-election following its second strike. (137)

In 2012, Australian companies and executives have forgone bonuses, raises, and incentive compensation perhaps due in some part to weak shareholder returns and fear of the Two-Strike Rule. (138) Several Australian companies have already promised to restrain pay policies even despite their rising earnings, (139) in what some have called "high-profile displays of remuneration 'austerity.'" (140) Other CEOs and boards have enforced cuts and freezes to fixed salaries for top executives. (141) The ISS claims these actions show "a burgeoning trend amongst some captains of industry to blunt allegations of runaway executive remuneration." (142) One recent academic study finds that in the first year of the "two strike" rule "CEO pay changes were negatively related to the level of shareholder dissent on the remuneration report," but that shareholders may have been too harsh on firms. (143) In the second year, however, the authors find that this trend was mitigated, especially for firms that received their second strike.

D. Belgium

1. Regulatory Framework for Shareholder Approval of Executive Remuneration Arrangements

The Belgian legal rules relating to compensation are straightforward: the company's articles of association (or, if they are silent, the general meeting of shareholders) determine both whether the directors shall be remunerated (144) and, if they are to be paid, the remuneration package for the services as board member. (145) Alternatively, the shareholders at the general meeting could indirectly decide to pay the directors by approving the company's accounts in which the remuneration is included (as a cost). (146) The general meeting of shareholders' decision about the remuneration of the directors only relates to the total amount granted to the board of directors. The board of directors decides how this total compensation package will be divided between the directors. (147)

In 2002, the statutory creation of a modified two-tier board structure in the Belgian Companies Code affected the director remuneration rules. (148) Firms have the option through their articles of association to empower the board of directors to delegate a large part of its powers to a management committee. In the event that the company's articles of association do not to provide rules for setting the compensation of the management committee members, the board of directors is empowered to set the remuneration package. (149) The board of directors has the power to set the pay of the corporate senior officers, such as the members of the management board and/or officers empowered to execute the day-to-day management of the company. The duties of the executive board members are therefore split between board membership and providing their services as executives.

Shareholders' powers to determine executive compensation at Belgian companies were increased after the financial crisis and the national and international debates regarding excessive remuneration of top executives. The law of April 6, 2010 altered the corporate governance rules for executive pay for listed and state-owned companies. (150) As a result, in their annual reports Belgian firms must now include a corporate governance statement, (151) as well as a detailed remuneration report. Moreover, they must establish a remuneration committee, set criteria for the variable part of the executive remuneration and have generous golden parachutes approved by the shareholders.

In addition, the general meeting of shareholders must every year vote on the company's remuneration report, a "Say on Pay" vote. According to the Companies Act, the remuneration report must provide detailed information on eleven remuneration items: (i) the process the board used in developing the remuneration policy, (ii) a statement of how the directors applied the remuneration policy during the accounting period, (iii) the remuneration package of each individual non-executive board member, (iv) the remuneration that senior executive officers receive for their role as directors, (v) the criteria and procedure to grant performance related pay to executive board members and senior executive officers, (vi) a detailed description of the individual remuneration package of the chief executive officer, (vii) a detailed description of the global remuneration package of the other senior executive officers, (viii) the number and main characteristics of shares, options and other rights granted, vested and/or executed, (ix) severance pay commitments, (x) the applied severance pay in case an executive board member or senior executive officer departed, and (xi) claw back provisions for variable pay based on misleading financial information. (152)

The shareholder vote is advisory so that the company is not obliged to revise any contractual engagements. Nor does the disapproval of the remuneration report affect the validity of the company's financial statements. However, if the shareholders disapprove the remuneration report, the board of directors is likely to revise the company's remuneration policy. (153)

The law of April 6, 2010 amended the Belgian Companies Code to give shareholders further power to restrict the structuring of the variable remuneration package and the share-based remuneration of the executives. It now requires a shareholder vote, or a facilitating article of association, (154) if the remuneration package of an executive board member or a senior executive provides for variable remuneration of which more than half is based on performance criteria of one year or less, or grants more than one quarter of the variable remuneration based on performance criteria measured over less than two years, or awards more than one quarter of the variable remuneration based on performance criteria measured over less than three years. (155)

Furthermore, the Belgian Companies Code now also requires shareholder approval, or a facilitating article of association, to deviate from a minimum "vesting period" for shares and share-based remuneration. Shares must not be vested earlier than three years after they are granted, while share options or other share-based benefits must not be exercisable earlier than three years after they are granted. (156) Finally, severance pay arrangements with executive directors and senior executive officers that exceed the amount of 12 months (157) remuneration (158) require the pre-approval of the general meeting of shareholders. (159)

2. Assessment of Shareholder Voting Power on Executive Remuneration Agreements in Belgium

The new Belgian Corporate Governance Code, with both a mandatory "Comply or Explain" requirement and a mandatory requirement to provide a remuneration report, greatly increased the amount of information disclosed concerning the remuneration of directors and executives and corporate remuneration practices. Previously most corporate boards did little to insure that shareholders had much say on executive remuneration policies. For example, in 2011, the last year before the new Say on Pay law came into operation, only 40% of the companies had the total gross remuneration package of the board of directors, or of a newly elected director, explicitly approved by the general shareholder meeting. The remaining companies had the directors' pay automatically approved with the approval of the financial statements.

In 2012, once the new Say on Pay law went into effect, over 90% of the companies put the item "remuneration report" on the agenda of the general meeting of shareholders. (160) Once again, companies' remuneration reports received high approval ratings from shareholders, although lower on average than in 2011. In Bel 20 companies, (161) the mean approval rate for companies' remuneration reports was 90.6%. A broader set of companies showed an even higher approval rate of 95.3%. In both instances, the median approval rates were even higher.

However, these figures conceal some companies where shareholder opposition was significant. For example, the shareholders of Agfa approved the company's remuneration report by a bare minimum with only 50.3% of the votes cast in favor, while the AGM of EVS approved its report with 64%, and only 69% of the Delhaize shareholders approved its report. (162) Importantly, all three companies have a relatively dispersed-ownership structure, and the other agenda items for the AGM, including the remuneration of the board members, were overwhelmingly approved. (163) Nevertheless, these votes clearly signaled discontent amongst these firms' shareholders with the board's remuneration policy. (164) At the 2013 general meeting of the government controlled telecom operator Belgacom the shareholders disapproved the remuneration report. The government held a large stake and withheld its votes, while over 70% of the remaining shareholders (165) voted against the report because it contained overly generous remuneration packages for the managers and directors. (166) Later that year, the CEO was dismissed and replaced. (167) The new CEO had to agree with a salary of maximum 650,000 [euro], less than half of the remuneration package of the previous CEO. (168) In 2014 the remuneration report of Belgacom was approved, although the government still abstained. (169)

In 2014 some other companies, like Agfa Gevaert and Arseus, experienced at the AGM a no vote for their remuneration report. Both companies started up discussions with shareholders to find out what triggered the investors to vote against the remuneration report. (170)

A remuneration report highlights many features of executive remuneration that can deviate from the proxy advisors,' as well as many investors,' positions. These can lead to the Pensions Investment Research Consultants (PIRC), (171) ISS and ECGS opposing, or issuing an "abstain vote" recommendation on, the company's remuneration report. Many investment managers follow these recommendations. (172) This is the likely explanation of the significantly higher shareholder opposition for the remuneration report, and in case of a company with a more dispersed shareholder structure, of even a majority no vote, like Agfa Gevaert and Arseus recently experienced. However, as many Belgian companies are blockholder controlled, and these blockholders support management, institutional investors' opposition does not lead to too big of a drop in overall shareholder support levels.

E. France

1. Regulatory Framework for Shareholder Approval of Executive Remuneration Arrangements

French public limited liability companies ("societes anonymes") are free to choose between a one-tier board structure and a two-tier board structure in the articles of association. A large majority of the companies adopt the one-tier board structure. The French commercial code requires the one-tier board of directors to elect a chairman, (173) either separating or combining this position with that of the chief executive officer. (174)

The French commercial code empowers the general meeting of shareholders to approve the total annual directors' fees for a one-tier board and the total annual supervisory board fees for a two-tier board. (175) This amount is paid for their services as board members (176) and not as executive officers. The shareholders must approve these payments, or the directors cannot be remunerated. The company can also provide directors with travel allowances and reimburse their business expenses (177) and pay directors additional amounts for performing specific duties. (178) While the shareholders approve the total amount of director compensation, only the board of directors, or the supervisory board at a two-tier board company, can allocate specific amounts of compensation to the individual directors.

For many years, the shareholders' only power with respect to director pay was their approval over the total remuneration for the board. More recently, beginning in 1995, the French legislature has focused on the transparency of the remuneration package of directors and executives; however, it has not empowered the shareholders to have a "Say on Pay." (179)

Instead, initially in 2005, and subsequently reinforced in 2007, French law provides that the general meeting of shareholders must approve two parts of a "common" remuneration package of executive directors and officers: termination agreements and additional retirement agreements. (180) The 2005 Breton Law (181) determined that for these two types of payment, any agreements entered into are subject to the same strict approval requirements as those applied to related party transactions. (182) These strictly regulated agreements are only valid if they get prior approval by the Board, the chairman of the board sends a notice to the auditors, the auditors issue a report, and the general meeting of shareholders approves them. (183) Directors of companies that "failed or directors who have personally failed" cannot receive any kind of termination fee. (184) Under the 2005 law, shareholders can reject termination agreements and additional retirement benefits. However, the remaining pieces of an executive's remuneration package are not subject to shareholder approval. (185)

French company shareholders do have some indirect influence over some elements of executive compensation packages. For example, the French commercial code requires that the shareholders vote to give the board the power to grant (free) restricted stock (186) and stock options (187) to the employees and the executive directors. (188) There are also some additional disclosure requirements. Under the 2007 TEPA Law, (189) the board of directors must disclose to the shareholders two reports related to any termination agreement: one that describes how the directors determined the performance conditions and the second detailing how those conditions are achieved. (190)

Like other countries, France has a mandatory "Comply or Explain" corporate governance code, called the AFEP-Medef Corporate Governance Code of Listed Corporations ("French Corporate Governance Code"). Companies in France are free to adopt this code's principles, but are not required to do so if they explain why they do not comply. (191) This code emphasizes the importance of full disclosure of the remuneration packages of the executive officers and board members.

In June 2013, the French Corporate Governance Code introduced a "Say on Pay" vote for shareholders with companies choosing either to comply by providing the vote or to explain why they did not do so. Companies that comply are required by Principle 24.3 "to present" (192) to the general meeting of shareholders for an advisory vote the individual remuneration packages of the executive directors (i.e. the corporate officers). They must disclose both fixed and variable compensation on an annual and, where necessary, multi-year basis. The disclosures must state any exceptional remuneration, share options, performance shares or other long-term pay for performance, golden parachutes, retirement benefits and in-kind benefits.

Shareholders vote separately on the remuneration package of the CEO and the other executive board members. If the shareholders vote against the pay packages (called providing "a negative advice"), the board of directors must, at one of its next meetings and after being advised by the remuneration committee, "deliberate" about the implications of the shareholder vote. Upon concluding these deliberations, the board must publish on the company's website the actions it intends to take, if any, in response to the shareholders' concerns. (193)

Enactment of the Comply or Explain principle in the French Corporate Governance Code avoided--at least temporarily--the introduction of a statutory "Say on Pay" requirement. According to Reuters, the government supports the Comply or Explain rule. (194) However, the French government introduced a new tax regime for the "rich," indirectly addressing what they consider excessive remuneration packages. (195) Furthermore, at state-controlled enterprises, including (large) listed companies like EDF and Aeroports de Paris, the government has mandated limits on the remuneration of the members of the board of directors to 450,000 [euro]. (196) Clearly there is more to come for executive pay regulation in France.

2. Assessment of Shareholder Voting Power on Executive Remuneration Agreements in France

In this Part, we pull together heretofore-uncompiled primary data to assess the shareholders' voting power on executive compensation arrangements at French companies. (197)

a. Voting on Total Board Pay

As discussed above, the shareholders vote to authorize directors' fees for French corporations. (198) However, companies only need to hold such a vote if they seek to increase these fees. Our analysis of the CAC-40 (199) companies' minutes from their general meetings from 2010 to 2012 shows that 53% of these companies sought shareholders' approval of directors' fees once during these three years. (200) More frequent approval was quite unusual: just three companies put the item on the agenda twice, and only two companies sought approval three times. Figure 1 below illustrates these data. We also note that one out of every three companies did not seek shareholder approval of these fees during these three years. (201)

Overall, and consistent with other countries, there is no significant opposition against the remuneration of French board members. Only three boards experienced opposition of more than 5% of the votes, with highest dissenting vote (almost 20%) at Societe Generate in 2011. (202) According to ISS research, in 2010 and 2011, the shareholders approved the remuneration of the directors with 98.4% and 97.3%, respectively. (203) The approval rates of 2012 do not differ significantly from those of earlier years. (204)

b. Strength of Shareholder Voting on Other Elements of Executive Pay

ISS data shows an increase in the numbers of shareholders voting on executive remuneration elements at French general meetings. (205) In particular, they find that votes that are directly or indirectly related to compensation, like the vote to authorize the board to grant restricted stock to employees and executive directors, and the vote to authorize termination agreements, can run into significant opposition.

One measure of shareholder views on executive compensation is how they vote on share incentive plans. In 2010, ISS found that the mean shareholder dissent rate for these plans was 14.2%, which dropped to 12.5% in 2011. (206) In both years, approximately 10% of these plans were rejected by shareholders. (207) We note that France is the only Continental European country where these plans are regularly disapproved. However, it is unclear why shareholders fiercely oppose these particular stock plans. One plausible explanation could be that the board of directors is viewed as being given too much discretionary power in the plans: the board sets the performance conditions, selects the beneficiaries, and chooses the allotment terms, etc. (208)

For 2012, we collected data on shareholder voting for all agenda items of CAC-40 companies and selected remuneration related agenda items: severance payment arrangements, authorization of the board to allot restricted stock, and authorization of the board to grant stock options on shares and retirement plans. The results are summarized in Table 1 below.

Table 1 shows that termination agreements are an agenda item at 29% of the companies and that shareholder opposition to them is relatively high: the average approval rate was only 66.6%. Looking more carefully at the data, we see that two thirds of the termination agreements received more than 25% shareholder opposition and that more than 40% of shareholders voted against seven such agreements. However, only the agreement of the CEO of Safran was disapproved. The shareholders also rejected the retirement plan of Safran's CEO, but the two other retirement plans were both approved by more than 98% of the votes. (210)

Stock option plans are generally considered as appropriate methods for incentivizing the executive board and management. Table 1 displays data illustrating that none of these plans garnered more than 15% opposition. Finally, shareholders were generally less enthusiastic about performance share plans. For example, the board of directors of France Telecom chose to withdraw this agenda item from the general meeting, while shareholders at other companies supported the authorization with less than 86% of the votes.

We also studied the compliance with the aforementioned new best practice principle 24.3 "to present" to the general meeting of shareholders for an advisory vote the individual remuneration packages of the executive directors (i.e. the corporate officers). All CAC-40 companies provided the shareholders with this advisory vote of the remuneration package of the CEO. (211) For other corporate officers we found mixed results. Some companies offered the shareholders the opportunity to vote on one or more executive directors, while others only provided the vote on the remuneration package of the CEO. However, the corporate structures of French groups differ significantly so it is not directly noticeable whether the company fully complied with the best practice 24.3 or not. The remuneration package of most CEOs was overwhelmingly approved, with 80% of the packages receiving more than 90% positive votes. None of the remuneration packages was disapproved. However the opposition was between 30% and 40% of the votes at three companies. It is too early to assess what triggers shareholders to vote against the remuneration package of the CEOs of the largest French companies. The total remuneration package can only be one of many other reasons. According to research published by Capital, (212) the CEOs of Sanofi, LVMH and L'Oreal all gained more than 8 million [euro] and shareholders approved these packages with 98%, 82% and 94%, while the CEO of Safran, who took only 1.6 million [euro] home, had his fee opposed by more than 36% of all shareholders.

F. Germany

1. Regulatory Framework for Shareholder Approval of Executive Remuneration Arrangements

a. The Two-Tier Board Structure

The mandatory two-tier board model is a core feature of the German stock corporation: the management board is responsible for running the business, (213) while the supervisory board must supervise the management board. The supervisory board can also be asked to approve specific types of transactions. (214) Directors that sit on one board cannot also sit on the other board at the same company. (215) The management board must manage and represent the company jointly unless the articles provide otherwise. (216)

The supervisory board elects the members of the management board for a term of up to five years and also has the power to dismiss the board. Members of the management board can only be removed for cause, like breach of duty or a vote of no confidence of the shareholders. (217) The members of the supervisory board are elected for maximum terms of four years. The size of the supervisory board depends on the value of the company's capitalization. (218) Further, the composition of the supervisory board is determined in part by different co-determination requirements.

b. Shareholder Approval Requirements for Executive Remuneration

As early as 1937, the German Stock Corporation Act required that the supervisory board had to make sure that the compensation of the management was reasonable, reflecting both the duties of the management board as well as the financial condition of the company. (219) The 1965 version of this Act confirmed this reasonableness requirement. However, case law on the assessment of the reasonableness of the remuneration is scarce. (220)

Under this regime, shareholders had no voting rights on executive pay as it was the supervisory board's responsibility to make this determination. The one exception was for share option schemes. The German Stock Corporation Act had very strict rules regarding the issuance of shares and share related instruments to protect the incumbent shareholders against dilution. Prior to 1998, share options for the management board were only legally possible with the issuance of convertible, or warrant, bonds which required the approval of a three-fourths majority vote of the shareholders at a general meeting where more than 50% of the capital of the company was represented. (221) In 1998, the Control and Transparency Act ("KonTraG") explicitly allowed the general shareholders meeting to authorize management to buy back stock to use in a stock option plan for members of the management board, significantly increasing the use of variable pay at German companies.

In 2009, the German Parliament enacted a new law, the Law on the Appropriateness of Director Compensation ("VorstAG"), which changed the executive remuneration system in Germany. The new law has three main features for listed companies of which one is for stock exchange listed companies, the general meeting of shareholders can be (but does not have to be) provided an advisory vote regarding the remuneration system of the management board. (222)

The German Corporate Governance Code copied these new requirements, providing an option for the shareholders to approve the remuneration system for management board directors, but also stating that the supervisory board must determine the total compensation of an individual member of the management board. (223)

For supervisory board members, the general meeting of shareholders, or the articles of association of the corporation, may set the amount of its members' compensation. (224) The supervisory board members' remuneration must be related to the duties of the supervisory board and the condition of the company. The German Corporation Act also provides as an option that supervisory board members can be paid a short-term bonus tied to the profits of the company. (225)

2. Assessment of Shareholder Voting Power on Executive Remuneration Agreements in Germany

a. Executive Remuneration in Germany

The development of the remuneration package of the German management board is relatively well mapped, partially due to the litigation after Vodafone's acquisition of Mannesmann in 2000 over an award of golden parachute severance agreements.

German executive compensation packages have grown substantially in the interim. From 2001 to 2012, the mean remuneration of an average member of the management board ("Vorstand") of the thirty largest German public companies listed on the DAX more than doubled from less than 1.2 million [euro] to more than 3.0 million [euro]. (226) As Figure 2 illustrates, this increase resembles a kinked curve. Between 2001 and 2007, remuneration packages jumped significantly. However, in 2008, during the Financial Crisis, the compensation of an average member of the Vorstand decreased by almost 30%. Since 2008, the Vorstand members' pay packages have increased again, surpassing their 2007 levels in 2011.

The CEO receives a much higher compensation than the other members. During this period, the mean compensation of the CEO soared from 3.7 million [euro] to over 5 million [euro]. At the highest end, the remuneration package of the CEO of Volkswagen reached 17.46 million [euro] in 2011.

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Title Annotation:Introduction through I. Description of the Say on Pay Regimes: Legal Rules and Voting Outcomes F. Germany 2. Assessment of Shareholder Voting Power on Executive Remuneration Agreements in Germany a. Executive Remuneration in Germany, p. 653-691
Author:Thomas, Randall S.; Van Der Elst, Christoph
Publication:Washington University Law Review
Date:Apr 1, 2015
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