The Impact of Investor Horizon on Say‐on‐Pay Voting
| Date | 01 October 2016 |
| Author | Georgios Voulgaris,Konstantinos Stathopoulos |
| DOI | http://doi.org/10.1111/1467-8551.12172 |
| Published date | 01 October 2016 |
British Journal of Management, Vol. 27, 796–818 (2016)
DOI: 10.1111/1467-8551.12172
The Impact of Investor Horizon on
Say-on-Pay Voting
Konstantinos Stathopoulos and Georgios Voulgaris1
Alliance Manchester Business School, University of Manchester,and 1Warwick Business School, University
of Warwick, Scarman Road, Coventry CV4 7AL, UK
Corresponding author email: georgios.voulgaris@wbs.ac.uk
Shareholder investment horizons havea significant impact on say-on-pay voting patterns.
Short-term investors are more likely to avoid expressing opinion on executive pay pro-
posals by casting an abstaining vote. They vote against board proposals on pay only in
cases wherethe CEO already receives excessivepay levels. In contrast, long-term investors
typically cast favourable votes.According to our findings, this is due to eective monitor-
ing rather than collusion with the management. Overall, investor heterogeneity in terms
of investment horizons helps explain say-on-pay voting, in particular the low levels of
say-on-pay dissent, which haverecently raised questions over the eciency of this corpo-
rate governance mechanism.
Introduction
This study examines the impact of shareholder in-
vestment horizon on say-on-pay voting patterns.
Say-on-pay is a corporate governance mechanism
first introduced in the UK in 2002, whichmandates
an advisory shareholder vote on executive pay ar-
rangements proposed by the board of directors. Its
purpose is to enhance the eectiveness of execu-
tive pay by improving transparency and increas-
ing shareholder involvement in its determination.
By empowering shareholders to expresstheir opin-
ion on the proposed executive pay arrangements,
this mechanism aims to mitigate concerns over ex-
cessive executive remuneration and rent extraction
(Conyonand Sadler, 2010; Ferri and Maber, 2013).
We gratefully acknowledge comments from Marc
Goergen (associate editor and discussant), three anony-
mous reviewers, Martin Walker, Moqi Xu, participants
at the Cardi Business School conference ‘Corporate
Governance, Shareholder Types and Ownership Forms’,
the 22nd MFS Annual Conference, CAAA 2015 Annual
Conference, AAA 2015 Annual Meeting, 38th EAA
Annual Congress and seminar participants at Warwick
Business School, University of Nottingham and Athens
University of Economics and Business.
Since its introduction, various studies have
examined the impact of say-on-pay on CEO pay
levels and structure in the UK. A number of
them show that, despite the fact that voting only
has an advisory role, high shareholder dissent
on the proposed pay arrangements can lead to
changes in the proposals (Alissa, 2015; Carter and
Zamora, 2009; Ferri and Maber, 2013; Gregory-
Smith, Thompson and Wright, 2014). In contrast,
Conyon and Sadler (2010) fail to provide strong
evidence that there are changes to pay propos-
als after a highly negative vote. Moreover, the
findings of these studies show that voting dissent
does not seem to be strong overall and that, on
average, significantly fewer than 10% of all votes
are against board proposals. These low levels of
voting dissent have been considered by some as a
sign of shareholder indierence to this mechanism
and have raised doubts over the eectiveness of
say-on-pay (Conyon and Sadler, 2010). Based on
theoretical arguments on the importance of insti-
tutional investors for corporate governance, we
build a set of predictions and show evidence that
the existence of long-term as opposed to short-
term institutional investors within the firm can
explain the low levels of shareholdervoting dissent
© 2016 British Academy of Management. Published by John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4
2DQ, UK and 350 Main Street, Malden, MA, 02148, USA.
Impact of Investor Horizon on Say-on-Pay Voting 797
and also provide a plausible explanation for the
conflicting prior findings on the eectiveness of
say-on-pay as a corporategovernance mechanism.
Prior research shows that institutional share-
holders’ investment horizons can significantly af-
fect their monitoring and informational rolewithin
the firm. Value maximization incentives will mo-
tivate shareholders to engage with their investee
firms (admittedly to varying degrees) through
monitoring (Becht et al., 2010; Cheng et al., 2010;
Maug, 1998). However, the extant literature iden-
tifies a cost−benefit trade-o underlying this ar-
gument. Shareholders rationally choose to bear
monitoring costs only if the associated benefits
outweigh these costs (Kahn and Winton, 1998;
Maug, 1998; Shleifer and Vishny, 1986;). Since
any benefits associated with monitoring are typ-
ically expected to materialize in the medium to
long term, shareholders with long-term invest-
ment horizons are the ones expected to bear those
costs (Doidge et al., 2015; McCahery, Sautner
and Starks, 2016). On the other hand, short-term
investors will rationally avoid monitoring, or in
other words will not engagewith their fir ms.In line
with this conjecture, prior studies find that short-
term investors avoid engaging with their investee
firms; rather, they use their informational advan-
tage and high sophistication levels to achieve pri-
vate gains through regulartrading (Brockman and
Yan, 2009; Bushee and Goodman, 2007).
Based on the above, we predict and find that
the lack of monitoring incentives for short-term
shareholders, combined with the legal requirement
for casting a vote, translates into high abstaining
say-on-pay votes from these investors, thus weak-
ening the eectiveness of this corporate gover-
nance mechanism in firms with a significant pres-
ence of short-term investors. In addition, we find
that short-term-oriented shareholders only cast a
negative vote when the CEO pay arrangements
are clearly excessive/abusive. Moreover, they show
greater sensitivity; i.e. they are more likely to cast
a negative vote on excessive pay in cases of poor
stock performance. These findings are consistent
with the aforementioned arguments on the lack of
engagement from short-term investors, since these
actions do not involve high monitoring costs.
We also argue and demonstrate that the exis-
tence of long-term investors within a firm increases
positive voting on the proposed remuneration,
since their continuous monitoring increases the
probability thatthe board’s proposals on executive
pay will be in line with shareholder expectations.
We confirm this conjecture by providing evidence
that the existence of long-term shareholders is neg-
atively associatedwith cases of excessive CEO pay.
Thus, we arm the role of long-term sharehold-
ers in facilitating eective monitoring and engage-
ment prior to the publication of the proposals as
opposed to colluding with managers. This result,
together with our finding that the average institu-
tional investor in the UK has a long-term invest-
ment horizon, helps explain the low levels of share-
holder voting dissent observed in prior studies.
FollowingGaspar, Massa and Matos (2005) and
Gaspar et al. (2013) we use investor turnover as a
proxy forinvestment horizon. Unlike prior studies,
we allow for the shareholder investment horizon
to be endogenous to firm decision-making. We
use instruments for investor turnover and voting
in two- and three-stage models and our results re-
main unchanged. Our findings also remain robust
to tests that control for ‘index hugging’ investors
who typically do not engage in firm monitoring.
To further capture the causal eect of investment
horizon on firm voting and mitigate the impact
of confounding eects, we run several propensity
score matching tests; the results remain consistent
with our expectations. Moreover, to alleviate
concerns that investor turnover is an imperfect
proxy for identifying investment horizons, we
rerun our models and use levels of firm ownership
by certain investor types, such as hedge funds and
investment advisors, instead of investor turnover
measures. The results remain consistent with our
arguments. Finally, due to the mandatory nature
of the say-on-pay votein the UK, our sample does
not suer from selection bias issues at the level of
the shareholder’s decision to cast a vote.
Our contribution to the say-on-pay literature is
twofold. First, we introduce institutional owner-
ship stability as an important determinant of the
say-on-payvoting outcomes. Weuse prior research
on the dierent monitoring and informational
roles of long-term and short-term investors within
the firm and argue that these dierences can
significantly impact on their voting behaviours. In
this way, our analysis complements prior studies
by identifying an important determining factor
of say-on-pay voting patterns. Second, our study
reconciles prior conflicting findings related to
say-on-pay eectiveness and shareholder interest
in this mechanism (Alissa, 2015; Carter, Ittner
and Zechman, 2009; Conyon and Sadler, 2010;
© 2016 British Academy of Management.
To continue reading
Request your trial