Say on Pay Lawsuits - Is this Time Different?
Kenneth B. Davis Jr.
University of Wisconsin Law School
Keith L. Johnson
Reinhart Institutional Investor Services
December 14, 2011
Univ. of Wisconsin Legal Studies Research Paper No. 1182
The first season of advisory shareholder "say on pay" votes under the Dodd-Frank Act has led to a number of derivative lawsuits challenging the compensation of senior executives at companies where shareholders voted against pay practices. The authors argue that boards might not always be automatically protected by the "business judgment rule" in these suits. First, unique policy considerations presented by say on pay votes can distinguish the cases from a typical corporate derivative lawsuit. That could invite closer scrutiny of executive pay decisions under a stricter judicial standard of review and increase chances that shareholders will be excused from the procedural requirement to file a demand with the board and defer to its decision on whether to allow the action. Second, institutional investors have an incentive to use say on pay litigation as one of the few viable means through which they can address ineffective and recalcitrant boards. The authors conclude by suggesting that boards improve disclosure, engage with key shareholders and resolve the causes of failed executive say on pay votes in order to reduce exposure to risks of loss in say on pay lawsuits.
Number of Pages in PDF File: 19
Keywords: Corporate Governance, Institutional Investors, Say on Pay, Executive Compensation, Derivative Litigation
JEL Classification: K41
Date posted: December 16, 2011 ; Last revised: January 27, 2012