Earlier this week, we noted that, when shareholders go to court to challenge executive compensation as excessive, they are often unsuccessful because courts generally defer to the business judgments of corporate boards. So, what’s a shareholder who strongly disagrees with how much a company is paying management to do? The shareholder could vote with her feet by selling her shares. Or, she could propose that the company’s executive compensation practices or the board that approved them be put to a vote at the next shareholders’ meeting. Shareholder proposals like these often face stiff opposition by management, and could be left off the agenda all together if management obtains permission from the SEC to exclude them.
Or, the shareholder could simply “say” that she disapproves and hope that management or the board responds. “Say on pay” provisions in Section 951 of the Dodd-Frank Act and the accompanying rules that the SEC issued in 2011 facilitate this type of communication by shareholders. They require public companies to hold shareholder votes at least once every three years on the compensation of the company’s most highly paid executives. However, the votes are advisory and non-binding. A federal judge in Delaware took that into account earlier this month in finding that Dodd-Frank say on pay requirements do not lower shareholders’ hurdles to effectively challenging executive compensation in court. Even where the shareholders in that case had voted 59% of their shares against approving the company’s executive compensation increases, the court held that the board’s judgment to allow the increases is presumed to be valid.