We examine the effect of say on pay regulation in the UK. Consistent with the view that shareholders regard say on pay as a value-creating mechanism, the regulation’s announcement triggered a positive stock price reaction at firms with weak penalties for poor performance. UK firms responded to negative say on pay voting outcomes by removing controversial CEO pay practices criticized as rewards for failure (e.g., generous severance contracts) and increasing the sensitivity of pay to poor realizations of performance.

We examine the economic consequences of more than 150 shareholder proposals to expense employee stock options (ESO) submitted during the proxy seasons of 2003 and 2004, the first case in which the SEC allowed a shareholder vote on an accounting matter. Our results indicate that these proposals affected accounting and compensation choices. Specifically, (1) targeted firms were more likely to adopt ESO expensing relative to a control sample of S&P 500 firms, (2) among targeted firms, the likelihood of adoption increased in the degree of voting support for the proposal, and (3) non-targeted firms were more likely to adopt ESO expensing when a peer firm was targeted. Additionally, (1) CEO pay decreased in firms in which the proposal was approved relative to a control sample of S&P 500 firms, and (2) among targeted firms, approval of the proposal was associated with decreases in CEO compensation and the use of ESO in CEO pay. Our findings reveal an increasing influence of shareholder proposals on governance practices.

Motivated by the increasing influence of shareholder votes on corporate policies, we examine investors' perceptions of activism via voting. To identify instances of activism via voting, we focus on annual meetings with at least one ballot item where a substantial fraction of shareholders is expected to vote against management's voting recommendation, indicating an increase in their monitoring activity. We define such meetings as “contentious.” Using a sample of almost 28,000 meetings between 2003 and 2012, we examine stock returns over the period between the proxy filing and the annual meeting. This period captures when investors learn about the contentious nature of the upcoming meeting and form expectations about its likely impact on firms' policies. We find that abnormal stock returns prior to contentious meetings are significantly positive and higher than those prior to noncontentious meetings. These higher abnormal returns increase with the contentiousness of the meeting; are more pronounced in firms with poor past performance, which are more likely to respond to shareholder pressure; and persist after controlling for firm‐specific news and proxies for risk factors. Our results are consistent with investors' expecting activism via voting to have a positive impact on firm value, on average, and cast doubts on regulatory attempts to restrict the use of shareholder votes.

We study whether outside directors are held accountable for poor monitoring of executive compensation by examining the reputation penalties to directors of firms involved in the option backdating (BD) scandal of 2006–2007. We find that, at firms involved in BD, significant penalties accrued to compensation committee members (particularly those who served during the BD period) both in terms of votes withheld when up for election and in terms of turnover, especially in more severe cases of BD. However, directors of BD firms did not suffer similar penalties at non-BD firms, raising the question of whether reputation penalties for poor oversight of executive pay are large enough to affect the ex ante incentives of directors.

We examine whether mandatory adoption of say on pay increases executives’ incentives to engage in insider trading to compensate for the negative impact of say on pay on the value of their explicit compensation packages. Our empirical design exploits the staggered adoption of say on pay laws across 14 countries over the 2000–2015 period. We find that mandatory adoption is associated with a material increase in insider trading profits, especially in firms where executive pay is most affected. The increase in insider trading profits is driven mostly by more frequent and larger profitable insider sales, consistent with executives’ desire to reduce their greater exposure to firm-specific risk while increasing their trading profits. Overall, our results highlight the importance of considering potential effects on insider trading incentives when designing compensation reforms and when assessing their effectiveness. Data Availability: All data used in the paper are available from cited public sources.