Does Shareholder-sponsored Corporate Governance Proposal Matter? The Case Of Executive Compensation

This study investigates the role of shareholder-sponsored corporate governance proposals in monitoring top management compensation. In particular, I test whether theories of agency costs, corporate governance, and optimal contracting can explain why shareholders submit executive-pay proposals, and examine the economic consequences of these shareholder proposals for the targeted firms.

I find that firms are more likely to receive performance-oriented shareholder executive-pay proposals when the firms have higher agency costs, stronger shareholder rights, or higher unexpected executive compensation. Shareholder executive-pay proposals gain more voting support from shareholders if the proposals are performance-oriented (than non-performance-oriented), sponsored by pension or union funds (than individual or religious groups and other institutions). In one year subsequent to the year of receiving performance-oriented shareholder executive-pay proposals, proposal firms' executive pay-performance sensitivities in stock option grants, and cash and total compensation increase more than control firms'. In addition, CEOs' compensation structures shift more toward equity-based for the proposal firms than for control firms in the year subsequent to the proposal year.