Let’s talk about money! Assessing the link between firm performance and voluntary Say-on-Pay votes

With the UK Directors’ Remuneration Act and the US Dodd-Frank Act, a decent amount of research has examined so-called Say-on-Pay votes in countries where they are legally mandatory. In contrast, little is known about countries such as Germany or Canada, both of which operate in a voluntary Say-on-Pay (SOP) system. In a voluntary SOP system, the firms’ managers can decide whether to sponsor a vote or not, and it is unclear how this decision and the subsequent voting dissent is influenced by firm performance. To reduce this research gap, this paper analysed a hand-collected sample from Germany covering 1746 annual general meetings that took place between 2010 and 2016. The results indicate that voting likelihood is positively associated with the relative market valuation of the firm (Tobin’s Q) as long as the firm meets or beats analyst earnings forecasts and is negatively associated with free cash flow when the firm fails to meet forecasts. Only large companies with dispersed ownership grant a vote when they do not meet or beat the forecasts. Once the vote has been cast, voting dissent is lower for firms that meet/beat their forecasts and have high free cash flows or high market valuations. However, shareholders do not reward high CSR-performance with less voting dissent. Overall, the results emphasise the importance of financial performance for SOP voting likelihood and voting dissent.