Will a Binding Vote by Shareholders on the Remuneration of Directors Affect Corporate Value?

Directors' remuneration has always been a controversial topic, in the court of public opinion the verdict seems to be that they are overpaid and this has led to a feeling of injustice. However misplaced this opinion is bearing in mind that most of the public may be guilty of looking at the value of the remuneration package alone and not the bigger picture of how well the company may have performed, the recent crisis in the banking industry has lent credence to the argument that executives are indeed being overpaid. The main arguments have been that the executives have undue influence over the composition and the value of their remuneration packages as well as the fact that these packages are not seen to be performance sensitive.Flowing from the above as well as outcries for increased shareholder activism, the United Kingdom inter-alia introduced in 2002 a directors' remuneration reform which provided that at every Annual General Meeting (AGM) companies are required to present their remuneration report to a non-binding vote by shareholders. This vote popularly known as ‘say on pay' acts as an advisory vote meant to signal to the board the shareholders' approval or disapproval of the remuneration report, the board is not bound to act based on the outcome of the vote.In other jurisdictions such as Australia, provision has been made at the AGM for a binding vote by shareholders on the remuneration reports presented by the board, the difference here being that these sort of votes force the company to act based on its outcome and is not merely an advisory vote. This sort of vote is popularly referred to as ‘binding say on pay' and this project aims to compare the effectiveness of both say on pay systems in order to discover which is more fit for the purpose. This project attempts to do this by an examination of the jurisdictions to which each of these say on pay systems have been applied in order to highlight the difficulties and the successes that have been experienced in its implementation.At the conclusion of this project the aim is to make suggestions for directors' remuneration reform within the corporate governance regime which would be effective in curbing the alleged excesses in directors' remuneration packages as well as result in an increase in firm value