Shareholder Voting: A Complementary Mechanism to Mandatory Disclosure Regulation

Abstract

We offer that, when regulators require firms to obtain stakeholder approval of a corporate decision through voting on a resolution, firms disclose additional information that is needed for stakeholders to understand the optimal nature of the proposal and to vote in favor of it. We suggest that this indirect regulatory approach to disclosure can improve transparency over and beyond that achieved through mandated disclosures alone. The study documents the effectiveness of this indirect regulatory mechanism in the context of Say-on-Pay rules relating to executive compensation. The analyses reveal that, even though firms were previously required to provide detailed compensation-related disclosures, the passage of the SoP rule increased disclosures further, especially among firms that had seemingly excessive pay packages. Also, firms that had previously failed their SoP voting or had received an ‘Against’ recommendation from a proxy advisor increase their compensation-related disclosures disproportionately. These additional disclosures also help the firms achieve better subsequent SoP voting outcomes. We conclude that stakeholder-voting regulations can be an effective tool to improve corporate transparency.

Keywords: Disclosure regulation, Say-on-Pay, executive compensation, key performance indicators, textual disclosures

JEL Classification: G30, M12, M41