Boards’ Response to Shareholders’ Dissatisfaction: The Case of Shareholders’ Say on Pay in the UK

In 2002, the UK adopted a regulation allowing shareholders to cast non-binding (advisory) votes on their firm's Directors' Remuneration Report during annual general meetings (the ‘Say-on-Pay’ rule). This study evaluates a decade of this regulation and examines how it affected the behavior of shareholders and boards in a sample of Financial Times Stock Exchange 350 firms during the period 2002–2012. I find evidence that shareholder dissatisfaction increases with excess Chief Executive Officer (CEO) compensation. This relationship does not exist for the expected level of compensation, suggesting that shareholders take a sophisticated approach when casting their vote. Boards do not appear to respond to shareholder dissatisfaction systematically; however, they do respond selectively by reducing the excessiveness of CEO compensation when performance is poor. Boards also seem to respond swiftly to shareholder dissatisfaction. There is evidence that the probability of CEO turnover increases with shareholder dissatisfaction. Overall, the evidence suggests that ‘Say-on-Pay’ regulation addressed regulatory concerns about transparency, accountability, and performance linkage.