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The Say When on Pay Vote: What Should a Board Recommend?

(The following post originally appeared on ONSecurities, a top Minnesota legal blog founded by Martin Rosenbaum to address securities, governance and compensation issues facing public companies.)

February 24, 2011

Should a public company board of directors be watching the “scoreboards” of previous “ballgames” when making a recommendation on this year’s frequency vote (“Say When on Pay”)? I’m referring to the tallies of the frequency votes of public companies that have already held their annual meetings this year. Keeping track of these votes, almost in real time, reminds me of watching ESPN’s BottomLine sports ticker. The conventional wisdom seems to be that boards of directors should base their recommended frequency on what they see on the sports ticker. I don’t agree, at least not in all cases.

It’s been widely reported that shareholders are generally casting a majority of votes in favor of an annual Say-on-Pay vote, even though the boards of directors in most cases have recommended a triennial vote. Many large shareholders have followed the advisory firm ISS’s blanket recommendation in favor of a vote for annual frequency, adding momentum to this trend. Last week, Mark Borges reported on these voting results in the Proxy Disclosure Blog on (a subscription site). He reported that a majority of companies recommending a triennial vote have had the shareholders vote in favor of annual votes. His statistics show that this trend toward an annual vote is even stronger at large companies – virtually no larger public companies have yet succeeded in bucking this trend (except a handful that have a single large shareholder who would agree with the board). He predicts, probably accurately, that this trend will continue.

How should the board respond? Here is Borges’ analysis:

So, at this point, is there any reason to make a triennial vote recommendation? My instinct says no - why put the board of directors in the position of having to make a difficult decision if - and when - the vote goes against you? I guess that a triennial recommendation still makes sense in two situations: one, if you're confident that your shareholders are in agreement with the recommendation, or, two, if you want to put shareholders on notice that, absent a near unanimous vote by shareholders, you prefer and intend to proceed with a triennial vote. Otherwise, I'm not sure that, at this stage, we aren't seeing the handwriting on the wall.

And Broc Romanek, in a recent post on The Advisors’ Blog on, agreed:

I agree wholeheartedly with Mark Borges' blog . . . . I'm not sure why companies continue to recommend triennial now that the early meeting results bear out that shareholders will often reject that frequency . . . . It's a reminder of what shareholder engagement is all about - listen to your shareholders and act on what they say. Clearly, many companies are choosing to operate in a bubble.

I have to respectfully disagree with Mark and Broc. The board should make recommendations based on its judgment about what is in the best interests of the company and its shareholders, after considering all relevant factors. For a company with stable management, sound pay practices and a long-term perspective on compensation, the board may legitimately believe that a triennial vote is the best option. And some large shareholders, notably the United Brotherhood of Carpenters, BlackRock Institutional Trust Company and Wellington Management Company, agree with this approach and will generally favor a triennial vote. Should the board ignore their viewpoints, especially if they are large shareholders?

Borges argues that, with a triennial recommendation, after the annual meeting it will be a “difficult decision” for the board to reverse course and recommend the annual vote favored by shareholders. Again, I disagree that this should be the deciding factor. The board can believe that a triennial vote is the best approach but later report that it has considered, and will follow, the preference expressed by the shareholders. I don’t see that as such a bad declaration by a board. However, it’s important that the board consider the right factors in advance, to avoid surprises:

  • Recognize that the triennial choice is an uphill battle in the best of circumstances.
  • If there have been, or will be, major changes in management or compensation practices, or other signs of instability, it is more difficult to conclude that a triennial vote is in the best interests of the shareholders. Recommend an annual vote.
  • Assuming that the actual vote is reasonably close, the board should carefully analyze the results in reaching its conclusion. Did the annual vote get a clear majority of the votes, or win by a narrow plurality? Did large shareholders who voted for an annual vote disclose the reasons for their vote to management? The final advisory vote rules under the Dodd-Frank Act give the company 150 days after the annual meeting to report a final decision on frequency. Take your time.
  • If the board doesn’t feel comfortable having the above discussion, then by all means the board should recommend an annual vote. But recognize that it’s not the only possible course of action.

I’ve talked to a number of in-house attorneys at companies of various sizes about this, and none of them believed that the above discussion was too difficult, or that it would cause great embarrassment to accept the will of the shareholders, or that somehow such a reversal by the board would embolden large shareholders more than they are already emboldened. Certainly, not every board will want to “go there” – everyone recognizes that the equation will be different for every board and every company. That’s one of the things that has made this issue so interesting.

Keep watching the sports ticker. Let’s just hope not every company will decide to forfeit based on the score of someone else’s game.


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