Shareholder Voting on Executive Comp. – What’s the downside?

Elizabeth Nowicki —  14 February 2007

There was an article this morning on CCN announcing Aflac’s decision to let shareholders vote on executive compensation.  A board resolution was passed to give “shareholders the right to a non-binding vote on executive pay packages that will take effect in 2009.”

I veiw this step by Aflac’s executives as very savvy.  Why bother leaving oneself exposed to shareholder outrage?  Exhibit A: Home Depot – even if they were totally justified in paying their outgoing CEO $210 M when he left – and I highly doubt they were - why would any board risk so offending their investors?Â

Regarding Aflac, I suppose Henry Manne would say “why allow the vote if the minority cannot control the vote?  The vote is a wasted effort – a useless display of ‘stockholder democracy.'”  My impression is that shareholders, at least on the margins, like to be heard – it cultivates their willingness to take the $10,000 they are holding for a new car in nine years or so and put it in the market.Â

Did Aflac’s board need to give their shareholders this voice?  No.  Can I see a downside?  No.  I suppose Larry Ribstein might argue that allowing this input skews the “agency cost” aspect of executive compensation by allowing an irrelevant third party (the stockholders) some input into the calculus of executive compensation.  Perhaps my L&E brethren will argue that allowing this input will drive down executive compensation and dry up the market for qualified senior executives.  I am not sure what Steve Bainbridge would say about this from his “director primacy” standpoint.  My view is that it will encourage boards to think harder about how they are going to justify to their shareholders any given pay package, and it will force executives to be prepared to justify whatever pay package they suggest to their directors that they should receive.  Neither of those things are bad things.

10 responses to Shareholder Voting on Executive Comp. – What’s the downside?


    I think shareholders voting is a fine idea. I doubt that Directors are really so much more able to pick out “managerial genius” than shareholders, and I predict that shareholders will have competitively huge bonuses for true managerial talent. Meaning a rapidly growing and sustainable share price.

    I also predict a lot fewer golden parachutes for failed top managers.

    “A lot” meaning the proportion for those companies who follow this model.

    Unfortunately, but almost inevitably, the model will be heavily judged primarily by the results of the first CEO pick. I sincerely hope more other companies try this model even before the success or failure of the first trial becomes evident.


    Echoing Larry’s starting point, let me point to Director Primacy and Shareholder Disempowerment, 119 Harvard Law Review 1735 (2006), also available at, in which I wrote that:

    [Lucian] Bebchuk recently put forward a related set of proposals designed to allow “shareholders to initiate and vote to adopt changes in the company’s basic corporate governance arrangements.” …

    … I do not quibble with Bebchuk’s extensive empirical demonstration of shareholder weakness; to the contrary, I celebrate it as further evidence that my director primacy model accurately describes how corporations work. Nor would I quibble very much with Bebchuk’s proposal were it to be framed as an alternative into which corporations could opt. As a good contractarian, I believe that “corporate law is generally comprised of default rules, from which shareholders [or boards, when applicable, for that matter] are free to depart, rather than mandatory rules. As a normative matter, … this is just as it should be.” As I understand Bebchuk’s proposal, however, he wishes to replace the existing mostly mandatory rules disempowering shareholders with a new set of mostly mandatory rules empowering them. In contrast, I argue herein that the existing system of director primacy should be preserved as the default rule.

    While Aflac thus is perfectly free in my view to adopt such a policy, I do think such proposals generally are bad ideas for the reasons I addressed in my TCS column on shareholder empowerment bylaw proposals:


    Hey Geoffrey, you’re up there, too.

    Elizabeth Nowicki 14 February 2007 at 1:27 pm

    Thanks. I absolutely missed that nuance of your position. (Or perhaps it is not a nuance, and I have just always failed to understand your position.)
    Thanks. Good insight.


    Actually I’ve always thought that it’s better to to say what somebody does argue than to say what he “might argue.” In a lot of blog posts and papers, including most recently my Accountability and Responsibility in Corporate Governance,, I have argued that corporate governance should be left up to contracts and markets. So why should be concerned when the board uses the power the corporate contract clearly gives it to survey the shareholders? Only to the extent Aflac is responding to the threat of future regulation in this heavily regulated corporate environment.

    Elizabeth Nowicki 14 February 2007 at 12:44 pm

    Good thoughts, all. And I appreciate your input from the real world, Prof. Hodak.
    I need to download a couple of papers, it seems.
    Thom, in terms of cost, we’re talking about adding another page to the proxy statement and adding another line item to the card, right? That cannot be expensive. Maybe it is. Worth thinking about. Thanks.


    I must agree with both Marc and Thom (and I am honored to be included by Marc among great scholars like Ribstein and Bain . . . oh, wait. He meant my dad). One problem with shareholder democracy or any other outside move to increase the role of shareholders in decisionmaking is precisely that the shareholders may, in fact, get a larger role in decisionmaking. As I note in my Hydraulic Theory of Disclosure article,

    Firms competing for investment dollars make intentional and competitive governance choices. And just as firms choose the extent to which corporate directors and managers will monitor agents or subordinates, firms also choose a suitable level of available monitoring by shareholders. The dynamic is slightly different; firms cannot generally control what shareholders will do if granted access to firm information, so rather than controlling the level of shareholder monitoring, firms must control the level of access in order to ensure that the appropriate level of monitoring is not exceeded. Firms in different situations will find different degrees of shareholder involvement to be competitively advantageous, and they may rationally choose levels of disclosure partly calculated to deter shareholder participation. Removing that deterrence makes monitoring more likely—to the detriment of some firms.

    Or, more succinctly: There is no support for the common misconception that just because some shareholder access to decisionmaking is good in some corporations some of the time, more access and more voting must be even better. (See Easterbrook & Fischel, Voting in Corporate Law, 26 J. L. & ECON. at 419).

    That said, as Thom points out, perhaps AFLAC is on to something–there’s nothing magical about the status quo, and innovations in governance and everything else happen all the time. The problem is their imposition from the outside (whether by direct or indirect coercion–and it’s hard to know whether the latter may be happening here).


    Some possible downsides would seem to be: (1) it’s expensive to administer this sort of vote (perhaps the benefits justify the administrative costs, but maybe not); and (2) if the SH vote is too stingy, boards may find it difficult to “buck” the SHs and offer a compensation package that’s lucrative enough to attract qualified to managerial talent. Shareholders would seem to be “rationally ignorant” of the market for top managerial talent (i.e., they don’t know the going rate for managerial geniuses, and they don’t have an adequate motivation to learn the market since the benefits of their knowledge acquisition efforts wouldn’t justify the costs). If they have a high-profile vote in which they set compensation too low, they may effectively prevent the board from hiring hot shots.

    I’m all for AFLAC attempting this tack. Maybe it’ll be good for the company (in which case, perhaps other will follow). But I’d have to disagree with your suggestion that there’s no downside.


    You can’t see the downside–politicized corporate decision making–because it’s not observable. That doesn’t mean it’s not real or significant.

    In a perfect world, I suppose investors should decide how their companies are run, including compensation policies. In the real world, increased shareholder involvement would not just “skew” agency costs, they would impose additional costs of unpredictable magnitude.

    As I see it, the thesis for increasing investor input is based on two flawed assumptions: (1) investors are able to assess the quality of comp plans at least as well as directors; (2) that even if they aren’t as competent, investor input is needed to overcome corrupt behavior among directors and the executives they supposedly oversee.

    The first assumption falls under the general heading “how hard could it be to run a company?” It’s hard. Even conscientious, diligent insiders are making tough trade-offs based on incomplete information. Based on my experience, outsiders, including large investors not on the board, should have no more say on HR strategy (including comp) than they do on, say, marketing strategy (e.g., setting prices).

    The second assumption, that boards can’t be trusted to watch over managers, is highly debatable, to say the least. In my experience, most directors, though not all, are quite conscientious and, if anything, wary about overpaying their CEO. Can directors distinguish compensation plans based on their shareholder-friendliness? Not well, as I note in my paper “Letting go of Norm,” where I criticized Nardelli’s plan about a year before the rest of the world figured it out ( But this deficiency has little to do with venal motives, and may actually result, in part, from too much concern about investor scrutiny.

    Unlike Manne, Ribstein, or Bainbridge–all legal scholars I greatly admire–I have actually worked with both institutional investors and corporate directors on compensation issues, so I hope my input gets some consideration.

Trackbacks and Pingbacks:

  1. ® - February 15, 2007

    Shareholder Voting on Executive Compensation: What Would I Think?…

    Elizabeth Nowicki notes Aflac’s decision to let shareholders vote on executive compensation. A board resolution was passed to give ‘shareholders the right to a non-binding vote on executive pay packages that will take effect in 2009.’ She goes on:D…