Agnes Grunfeld, CFA, Managing Director
Since 2011, all US public companies have been required to
submit their compensation plans to a periodic advisory vote by shareholders,
which is commonly referred to as "Say on Pay." A number of our clients
have asked us whether "no" votes on Say on Pay seem to bear any relationship to
securities class action (SCA) lawsuits, and whether we are incorporating this
information into our litigation model.
The answer to the first question is a resounding "yes."
In both 2011 and 2012, Russell 3000 companies that experienced SCAs were
roughly twice as likely as index companies generally to experience Say on Pay
"no" votes of 10% or more. For example, in 2011, nearly 54% of the
companies that faced SCAs also received at least 10% "no" votes on Say on Pay;
in 2012 over 46% of the companies facing securities litigation had negative
votes at this level. These figures are striking because at most companies, "Say
on Pay" resolutions are overwhelmingly approved: across the two years,
only 25% of companies in the Russell 3000 experienced "no" votes of 10% or
However, it's important to note that this analysis covers
only two years of data (and a total of 130 SCAs), and showed a simple
relationship between votes and SCAs that occurred in the same year, without
analyzing which came first or how much time elapsed between them. To incorporate
this data into our statistical model, we would need a much larger data set, and
would have to track exact dates in order to see if shareholder votes could help
predict subsequent SCAs, with various lead times. So this is a project
we'll likely revisit a few years down the road.
In short, while not conclusive, our review of the first
two years of Say on Pay does show a link between shareholder disapproval of pay
plans and SCAs. The reason for this may be that poor compensation
practices are associated with other weaknesses in management quality that make
firms more likely to face securities class action litigation.
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