August 1, 2012
Unintended Consequences of Say-on-Pay: Are Bondholders Hurt?
– Broc Romanek, CompensationStandards.com
Check out this interesting paper from Profs. Fortin, Zhang, Subramaniam and Wang entitled “Incentive Alignment Through Shareholder Proposals on Management Compensation and its Bond Market Reaction: A Creditor’s Perspective.” Here is an excerpt:
“We contribute to the literature as well as the ongoing regulatory debates in several ways. First, we present ground-breaking evidence of bondholder reaction to shareholder proposals. Unfortunately, the realignment of manager and shareholder interests is not without consequences to a firm’s other stakeholders, as it is associated with a decrease in bond returns. Because there is a trade-off between shareholder-manager interest alignment and shareholder-bondholder conflict (DeFusco et al. 1990; Klein and Zur 2010; Ortiz-Molina 2007), our results suggest that boards of directors and regulators should adopt a balanced approach in dealing with activist shareholder campaigns, particularly those concerning top management incentive compensation.
The SEC was established in the 1930s with a mandate to protect investors in securities (both stock and bonds). To fulfill its duty towards public bondholders, the second SEC chairman William Douglas lobbied to pass the Trust Indenture Act of 1939 and established the bond trustee system in America. Recently, in response to the Dodd-Frank Act of 2010, the SEC released the new “Say-on-Pay” regulation in January 2011. From a bondholder’s perspective, the new SEC regulation might bring in unintended consequences, potentially compromising its duty towards bondholders.”