Accounting disclosures are meant to inform investor and creditor decisions but inherent in that goal is the ability to influence those decisions. Proponents of including conservatism in SFAC 8 would argue that neutrality can never truly be achieved because of this fact and management’s intentions. But then there are some disclosures meant to influence by design. These come in the form of “comply or explain” disclosures mandated by governments. For instance, Dodd-Frank requires disclosure of business dealings with Iran, hoping that will discourage companies from engaging in those dealings.

The government has instituted this idea with executive compensation. In 2006, they instituted detailed disclosures around compensation policies and processes. Since then, continuing rises in compensation and the idea that misguided compensation incentives contributed to excessive risk-taking have gained increasing public interest. The government responded by expanding the use of Say-on-pay (SOP) votes. These are nonbinding “yes” or “no” shareholder votes on executive compensation packages. The hope was that the disclosures coupled with the active involvement of shareholders would drive compensation reforms. The 2011 proxy season marked the first year that SOP votes were used extensively in the US.

Here are some results:
• 37 companies in the Russell 3000 (<2%) had SOP failures (proposals receive < 50% support).
o Of those, 50% had double-digit negative 3-year returns
• The Energy sector had the lowest approval rate.
• Of interest, the financial services sector had the 2nd highest approval rate.
• The average company received 90% approval votes from their shareholders.
• Mean compensation was up 16% (to $11M) and median was up 33% for an S&P 500 CEO.
• Institutional Shareholder Services recommended “no” votes on 13% of companies (recommendations followed in 10% of those cases)
• 95% of S&P 500 companies elected to hold SOP votes annually. Management recommended annual votes at only 50% of companies.

From the government’s perspective, there are some bright spots. Companies with both extremely poor performance and high compensation packages had failed votes. Shareholders went against management recommendations at many companies by electing annual votes. There is an overall feeling that companies are engaging in more active dialogue with shareholders over compensation. But for the overall goal of reforming executive compensation amounts, the results are not very promising. It will be interesting to see how the SOP voting results trend in future years. But when we expand the idea of cost/benefit constraints to larger-scale social benefits beyond decision-usefulness, it certainly can add more confusion to an already subjective concept.