The first problem detected was the lack of transparency and the absence of accounting statements from the Board of Directors to the company’s shareholders. Precisely, the expression “Say on Pay” comes from this lack of the shareholders’ opinions regarding the CEOs’ remunerations. The first example of legislation with the goal of promoting these principles of “good corporate management” appeared in United Kingdom and was introduced in 1988 as “Combined Code on Corporate Governance”.
“Fulfill or explain”. This was the requirement that UK’s legislation imposed on listed companies. These companies had to fulfill the “good corporate management” principles or they had to explain the reasons for which they decided not to comply. Anyhow, because of the poor observance of the Combined Code, another step forward towards this regulation occurred in 2002 when the Remuneration Report Regulation was created. This regulation enforced the idea of voting regarding the CEOs’ remuneration (even though this voting maintained its counseling nature) in the shareholder’s annual meeting. Since these UK reports, many countries such as the United States and international organizations such as the European Commission have developed and proposed new reports and codes of “good corporate management”. In Spain, these regulation attempts have been manifested in some articles of the Sustainable Economy Act.
What does fate have in store with the enforcement of this new law? Until now, in the case of Spain as well as the cases of United Kingdom and the United States, the enforcement of the recommendations regarding the CEOs’ remuneration has been poor. Only 35% of the companies have fulfilled the recommendations about the general meeting. Thus, the majority of cases still are those in which the shareholders do not even participate in this decision, or those in which even though voting against the CEOs’ and top executives’ remunerations report offered by the Board of Directors, this report has been stopped from moving ahead.
It seems obvious that by acting this way the Board of Directors should be aware that they risk being replaced by the shareholders, yet the reality is another. The diversity that currently exists among shareholders usually causes very different reactions, without a doubt very far from promoting a collective action, including rejections like that of the directors (the refusal by the Board of Directors to take into account a negative result of a voting). In addition to all that was previously explained, there is another problem: the Boards of Directors try to give the image as to be independent, but really they are not. This impinges on the total independence of the “say on pay” practice, which makes it that much more difficult.
Another additional difficulty to the limited “true” independence of the Board of Director’s members can be found in the fact that in practice it is generally very difficult to count on reliable information in some fields. The reason is due to the fact that this information is usually created and presented by the executive staff to which they want to control.
Definitely, during the next months we will see the real effect of this legislative piece. We will also prove if this new regulation attempt is enough to solve the great doubts, which currently have resounded once again, about the determination, the possibility of demanding and the tax deductions regarding the retributions received by the chief executives of big companies. No doubt that to make everyone happy, the most convenient way would be to face this situation from a realistic perspective, which should be far from the populist demagogy as well as from the rest of existing lobbies. And it wouldn’t be a bad thing if the companies, by themselves, introduce in their compensation policies clauses that could decrease the differences between the best and worst paid individuals in the company.
If we look back, this is not as strange as it seems to be. In the United States, General Electric voluntarily introduced more transparency in their SEC (Security Exchange Commission) reports. And these improvements were later followed by the majority of the participated companies, in part due to the pressure of their own shareholders and in part because of the SEC’s coercion. Regarding Spain, our country is not a meritocracy (yet) in the business sector; and therefore, to introduce all these procedures is much more difficult. Despite the previous statement, the positive fact is that because Spanish companies are beginning to be present in the most demanding markets, these practices will inexorably be imposed. Just give it time.