Corporate Governance of Financial Institutions – Does say-on-pay matter?

Project Start:04/2013
Researchers:Biljana Biljanovska, Guido Ferrarini, Brigitte Haar, Randall S. Thomas, Tobias Tröger, Uwe Walz, Charles K. Whitehead
Category: Law and Finance, Transparency Lab
Funded by:LOEWE

Topic & Objectives

Excessive remuneration has raised legislators’ awareness and has become the subject of intense academic debate. The project, combining empirical and legal analysis, seeks to enhance our understanding of the link between potential conflicts of interest (shareholders vs. managers and shareholders vs. tax payers) and to provide the basis for an improved corporate governance of financial institutions. In particular, the say-on-pay provisions may endorse aforementioned conflicts.

SAFE Working Paper No. 154

This paper aims to explore what is driving code compliance and the underlying legitimacy of corporate governance codes. Rules that motivate corporate behavior, but do not greatly affect corporations' material interests can then shed a light on motives that go beyond shareholder wealth maximization to include stakeholder interests. ln order to identify these motives rate of compliance of distinct provisions of the German Corporate Governance Code are analyzed. At the example of the recommendation of incentive pay for supervisory board members it is shown that case law and the legal discussion enter into corporations' decisions whether to comply to a high degree. ln the case of severance pay caps outrage constraints seem to be decisive and form the basis for a pressure how to explain non­-compliance. This opens the view further to highlight the importance of stakeholder and group interests at the example of compliance with the recommendation of age Iimits for supervisory board members. Overall the evidence highlights the amalgam of motivations that may play an important role for corporations' motivation to comply or not to comply with corporate governance codes which are, by no means, limited to shareholder wealth.

SAFE Working Paper No. 125

This paper investigates the potential implications of say-on-pay on management remuneration in Germany. On the basis of a hand-collected data set for Germany's major firms (i.e. DAX 30), for the years 2006-2012, the analysis suggests some effects of the German natural experiment that originates with the 2009 amendments to the Stock Corporation Act of 1965. Data for all members of the management board for the entire period under investigation was collected, and it could be shown that the compensation packages of management board members of Germany's DAX30-firms are quite closely linked to key performance measures. In addition, according to the analysis, salaries increase with the size of the company; ownership concentration has no significant effect on compensation. The findings suggest that the two-tier system seems to matter a lot when it comes to compensation. However, it would be misleading to state that no significant impact of the introduction of the German say-on-pay-regime can be seen. Overall, the findings suggest that supervisory boards anticipate shareholder-behavior.

SAFE Working Paper No. 107

This paper examines the determinants of say-on-pay votes, the approval rates of say-on-pay votes, and the effect of say-on-pay votes on Annual General Meeting (AGM) participation. It finds that the propensity for a say-on-pay vote increases with firm size, abnormal executive compensation and free float of shares. Smaller firms with concentrated ownership do not only have a lower propensity for a say-on-pay vote, but also show a higher propensity to opt for only limited disclosure of executive compensation. This finding indicates that say-on-pay in Germany does encourage executives to seek legitimacy from their shareholders for compensation packages, especially if they are in an environment prone to excessive managerial power. With respect to approval rates of say-on-pay votes, the paper finds that approval rates of say-on-pay votes are lower than the approval rate for the average AGM agenda item, in particular for firms with a dispersed shareholder base. This effect is increasing in (i) free float as well as for (ii) firms with abnormal executive compensation. As expected, the existence of blockholders counteracts this tendency, most likely due to coordination between supervisory board and blockholders prior to granting a vote. The authors interpret this result as shareholders making use of the possibility to express their views on the executive compensation systems in place. With regard to the effect on AGM participation, the paper finds that say-on-pay votes can actually increase AGM participation, however, only with widely held firms. This finding puts a new perspective on say-on-pay, as it implies shareholders engagement with firms is increased via say-on-pay. Finally, an analysis on executive compensation and say-on-pay covers compensation data from 2006 to 2013. While the authors cannot find any impact on total compensation levels, their insights suggest that the voluntary say-on-pay regime in Germany has strengthened pay for performance elements in executive compensation.

Related Published Papers

Author/sTitleYearProgram AreaKeywords
Tobias Tröger, Uwe WalzDoes Say on Pay Matter? Evidence from Germany
European Company and Financial Law Review
2019 Law and Finance, Transparency Lab Say-on-pay, corporate governance, management compensation
Brigitte Haar"Comply or Explain" im Spannungsfeld von Law and Finance
100 Jahre Rechtswissenschaft in Frankfurt (Vittorio Klostermann)
2014 Law and Finance, Transparency Lab

Related Working Papers

No.Author/sTitleYearProgram AreaKeywords
125Tobias Tröger, Uwe WalzDoes Say on Pay Matter? Evidence from Germany2016 Law and Finance, Transparency Lab Say-on-pay, corporate governance, management compensation
154Brigitte HaarShareholder Wealth vs. Stakeholder interests? Evidence from Code Compliance under the German Corporate Governance Code2016 Law and Finance, Transparency Lab corporate governance codes, soft law, stakeholder, shareholder wealth, market enforcement, German corporate governance, supervisory board, incentive pay, severance pay caps, age limits
57Brigitte HaarFinancial Regulation in the EU – Cross-Border Capital Flows, Systemic Risk and the European Banking Union as Reference Points for EU Financial Market Integration2014 Law and Finance, Transparency Lab Financial regulation, systemic risk, microprudential supervision, European Banking Authority, macroprudential supervision, European Systemic Risk Board, European Banking Union, Single Supervisory Mechanism
107Daniel Powell, Marc Steffen RappNon-Mandatory Say on Pay Votes and AGM Participation: Evidence from Germany2015 Law and Finance, Transparency Lab Corporate Governance, Executive Remuneration, Say on Pay, Annual General Meeting, Germany