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

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