Note – Say-on-Pay with Bite: Shareholder Derivative Suits on Executive Compensation

Louis Truong

Volume 65, Issue 4, 1191-1220

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 mandated
shareholder advisory voting for executive compensation in public corporations. This
vote, known as “say-on-pay,” enables shareholders to provide input on the size and
nature of executive compensation packages. The impetus behind mandating say-on-pay is
the concern that corporate executive pay has grown increasingly excessive. To that end,
say-on-pay has not been successful, as the first three years of voting have not produced a
significant effect on executive pay. However, the voting results have suggested changes in
other ways, indicating that shareholders can be influenced in the decisionmaking process
for executive pay.

Due to the advisory nature of say-on-pay, shareholders have few methods of recourse in
the event that a corporation chooses to ignore shareholder input. Shareholders generally
lack sufficient power to influence corporations and their boards. Shareholders have had
little success through litigation, as courts have been reluctant to consider a say-on-pay
vote as the basis for establishing demand futility, a pleading requirement for shareholder
derivative suits.

This Note argues that a say-on-pay vote should be sufficient for establishing demand
futility in limited circumstances. Courts should apply a stricter standard of judicial review
when directors ignore a say-on-pay vote, placing the onus on the directors to show that
they properly considered the vote, and that the compensation packages for executives
were reasonable. Enabling shareholders to use the threat of litigation provides extra
muscle for say-on-pay, making it a more effective mechanism for controlling executive
pay.

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