Say on ESG: The Adoption of Say-on-Pay Laws, ESG Contracting, and Firm ESG Performance

58 Pages Posted: 9 Jun 2022 Last revised: 7 Jun 2023

See all articles by Mary Ellen Carter

Mary Ellen Carter

Boston College - Department of Accounting; European Corporate Governance Institute (ECGI)

Andrea Pawliczek

University of Colorado at Boulder

Rong (Irene) Zhong

University of Illinois at Chicago - Department of Accounting

Date Written: November 30, 2021

Abstract

Concurrent with greater investor focus on ESG performance is the increasing use of ESG-related contracting metrics in executive compensation contracts. We investigate these two related issues in the context of the adoption of Say-on-Pay (SOP) voting laws, which give investors a direct voice in compensation and an additional way to express their preferences. Exploiting the staggered adoption of SOP laws around the world, we document an increase in ESG contracting and a subsequent improvement in ESG performance after the adoption. The improvements in ESG performance are concentrated in firms that adopted ESG contracting, suggesting that ESG contracting is a pathway to facilitate better ESG performance. ESG contracting matters more when SOP voting is likely to have greater influence, including firms that face high initial SOP voting dissent and when votes are binding. Lastly, we show that the ESG contracting contributes to the positive effect of SOP laws on shareholder value.

Keywords: corporate social responsibility, compensation contracting, say on pay laws, corporate governance, regulations

JEL Classification: G15, G34, G38, M12

Suggested Citation

Carter, Mary Ellen and Pawliczek, Andrea and Zhong, Rong (Irene), Say on ESG: The Adoption of Say-on-Pay Laws, ESG Contracting, and Firm ESG Performance (November 30, 2021). European Corporate Governance Institute – Finance Working Paper No. 886/2023, Available at SSRN: https://ssrn.com/abstract=4125441 or http://dx.doi.org/10.2139/ssrn.4125441

Mary Ellen Carter

Boston College - Department of Accounting ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Andrea Pawliczek (Contact Author)

University of Colorado at Boulder ( email )

1070 Edinboro Drive
Boulder, CO 80309
United States

Rong (Irene) Zhong

University of Illinois at Chicago - Department of Accounting ( email )

601 South Morgan Street
University Hall, Room 2303
Chicago, IL 60607
United States

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