Chapter 5. Say on pay and the detail of disclosure of remuneration

This chapter presents the results of the review in the area of say on pay and the detail of disclosure of remuneration. It takes stock of the criteria and mechanisms that may motivate and allow flexibility and proportionality in the implementation of rules and regulations relating to the area across the 39 jurisdictions that responded to the survey used for the review. It also includes a case study of the Swedish corporate governance framework in the area submitted by Rolf Skog and Erik Lidman.



Say on pay and the detail of disclosure of remuneration

The Committee's first thematic review, conducted in 2009, focused on board practices related to setting incentives and governing risks. It covered 29 jurisdictions, including in-depth reviews of Brazil, Japan, Portugal, Sweden and the United Kingdom. The review and its findings (OECD, 2011), explain that since the financial crisis boards are under scrutiny with respect to their ability to effectively oversee executive remuneration, as recommended by the G20/OECD Principles.1 It points out that the challenge lies not only in setting an adequate level of executive and director remuneration, but also in designing incentive schemes that are aligned with the longer term interests of the company as a whole.

The report also noted that legislators and regulators have limited capacity to influence remuneration outcomes with legal and regulatory tools, which was the reason why very few jurisdictions had legislated specific measures affecting the setting of remuneration at the time. Rather, it noted that policy makers have focused on facilitating the well-functioning of firms' own governance arrangements, so that they can deliver appropriate remuneration and incentive outcomes (Box 5.1.). In this respect, the report highlights the role of say on pay mechanisms in providing shareholders a means to express their views on director and executive remuneration, as well as of disclosure of remuneration outcomes and better explanations of how incentive-based remuneration aligns with company performance.

Although some of the fundamental issues remain, much has changed in relation to the rules and practices for say on pay and, to a lesser degree, regarding disclosure of remuneration, since the period covered in the 2011 OECD report. The Principles themselves have also been subject to an extensive review and now address the topic in more detail.

Box 5.1. Excerpts from OECD (2011) Board practices: Incentives and governing risk

As a general rule, legislators and regulators capacity to influence remuneration outcomes via hard means is quite limited, and very few jurisdictions have legislated specific measures to control the level of executive and director remuneration. Policy makers have rightly focused more on measures that seek to improve the capacity of firm governance structures to produce appropriate remuneration and incentive outcomes. These can roughly be characterised as i) measures to improve internal firm governance and especially via mandating certain levels of independence by the board; ii) improved disclosure to shareholders on remuneration outcomes, and better explanation of how incentive based remuneration aligns with company performance; and iii) providing mechanisms to allow shareholders a means of expressing their views on director and executive remuneration.

Many jurisdictions have favoured soft law measures that can go further in providing guidance on the structure of remuneration systems. Codes are often a more appropriate mechanism for normative controls on remuneration and guidance on remuneration structure; they are generally more flexible to individual firm characteristics and can adapt to changing market circumstances. (…)

Policy options have focused on improving shareholder engagement and remuneration disclosure. Active shareholder engagement can provide a strong monitoring function on the role of boards in the remuneration process. The legal frameworks across countries vary greatly in the extent to which shareholders have a voice in setting/influencing director and executive remuneration, from placing the matter entirely in the hands of the general meeting, to giving shareholders no formal role. The Principles recommend simply that shareholders should be able to make their views known.

The experience of OECD countries suggests that the effectiveness of "say on pay" provisions is fundamentally linked to having active and informed shareholders with a sufficient capacity to influence the board. Policy makers need to identify innovative mechanisms for providing institutional shareholders with better incentives and cost effective means, for exercising their shareholder rights. Policy measures adopted to date have included introducing codes of behaviour for institutional shareholders to exercise their voting rights diligently and reducing the costs of shareholder participation by more effective proxy access.

The quality and timeliness of disclosures around incentive and remuneration arrangements is also critical to informed shareholder engagement, and providing a level of assurance to minority shareholders that remuneration is structured to align executive and director incentives with the interests of the company as a whole. Accordingly, a key policy focus for many jurisdictions has been (and should continue to be) to improve the disclosure requirements to support pre-existing "say on pay" arrangements. These measures are focused on both a greater level of disaggregated disclosure and a more comprehensive description of the drivers of remuneration outcomes and their relationship to firm performance. In other jurisdictions, code makers have introduced amendments designed to encourage more description of how incentive arrangements align manager/director interests with those of the company and shareholders.

Issues and trends

The discussion about compensation practices did not start with the financial crisis, but attracted significantly more attention after it. In the face of the collapse and near-collapse of large and sophisticated firms, many believed that their corporate managers had been remunerated in ways that led to reckless performance and that compensation practices had to be reined in to reintroduce sound incentives and accountability.

Beyond any subjective views on the appropriate form and level of executive remuneration, the reality is that since the financial crisis a large number of jurisdictions have made policy interventions to address the issue of executive (and board) compensation involving the two instruments that are subject to this review, namely disclosure and say on pay (Thomas and Van der Elst, 2014[10]). These types of interventions largely aim to give information and a voice to the firms' stakeholders that could exercise pressure to establish executive pay at an efficient level, and to better align incentives.

Even if the main focus might have been CEO pay, remuneration disclosure and say on pay mechanisms have extended in most jurisdictions to cover all senior managers and also to the board. Even jurisdictions that did not experience a problem (or the perception) of misaligned or uncontrolled compensation have also adopted, at least partially, these mechanisms for monitoring and adjusting executive pay. They are now seen by the investor community as important accountability and stewardship tools for governance frameworks (see section 3 for a description of the Swedish experience).

Figure 5.1. Say on the remuneration policy across jurisdictions

Note: This Figure shows the number of jurisdictions in each category and their percentage share out of the 46 jurisdictions included in the sample.

Source: OECD, 2017 Corporate Governance Factbook.

The OECD Corporate Governance Factbook tracks these developments. Nearly ninety per cent of jurisdictions covered in the 2017 edition had by year end 2016 introduced one or more mechanisms of normative control of remuneration, most often through a Code or other soft law instruments that rely on a flexible "comply or explain" approach.2 Only India and Saudi Arabia reported maximum limits on remuneration, while a majority of jurisdictions had adopted general criteria or specific measures to address the links between remuneration and the longer-term interest of the firm (with schemes adopting most commonly a 2 or 3-year vesting period for stock options) and caps on severance payments (between half and 2-years' remuneration).

A majority of jurisdictions included in the OECD Corporate Governance Factbook set forth a requirement or recommendation for a binding (36%) or advisory (15%) shareholder vote on remuneration policy (Figure 5.1.).

The OECD Corporate Governance Factbook describes a wide variety of features of the "say on pay" mechanisms used by jurisdictions. These include cases where the vote covers only the remuneration policy in general versus others when it affects the total amount or level of remuneration (Figure 5.2.). Likewise, some mechanisms encompass the compensation of the senior managers only, while others also affect the remuneration of board members.

Figure 5.2. Say on level/amount of remuneration across jurisdictions

Note: This Figure shows the number of jurisdictions in each category and their percentage share out of the 41 jurisdictions included in the sample.

Source: OECD, 2017 Corporate Governance Factbook.

This variability and its impact on cross-border holdings by investors was invoked by the EU when in 2014 it first proposed the recently adopted amendments to the EU Shareholder's Rights Directive (2007/36/EU). The European Council described that the remuneration information disclosed by EU companies was "not comprehensive, clear nor comparable" and that shareholders often "do not have sufficient tools to express their opinion on directors' remuneration" (European Commision, 2014, p.  5[11]). For this, it proposed to adopt an obligation to disclose the remuneration policy and individual remunerations, combined with a shareholder vote on the company's remuneration policy, as it was finally adopted in April 2017 (Box 5.2.).

The effects of the existing say on pay and disclosure mechanisms vary across jurisdictions, but a recent study shows interesting results. Analysing financial data for 17 000 publicly traded companies in 38 jurisdictions with and without say on pay mechanisms in place, one study has found that CEO pay growth is slower and its sensitivity to firm performance higher (about 5% more) when a say on pay mechanisms is present, regardless if it is binding or only advisory (Correa and Lel, 2016). The study also finds, on the one hand, that the effects over CEO pay are larger in firms with poor performance, and, on the other, that most votes against pay packages come from sophisticated investors, rather than from retail stockholders.

It is not the objective of this report to evaluate the results of the say on pay and compensation disclosure mechanisms, and the jury is still out as to whether the results already documented are indeed increasing the alignment of compensation with the long term interest of the company. It is nonetheless worth noting that the measurements and analysis so far do not capture the degrees of flexibility and proportionality in the mechanisms evaluated. The results of this thematic review could enrich that research and our debate on compensations policies, as the issue of executive pay and its alignment remains at the heart of the corporate governance reform in many jurisdictions.

Box 5.2. Excerpts from the 2014 amendment proposal for the EU Shareholder's Rights Directive

According to the principle of subsidiarity the EU should act only where it can provide better results than intervention at Member State level and action should be limited to what is necessary and proportionate in order to attain the objectives of the policy pursued. As regards this aspect it is important to note that there is strong evidence that the EU equity market has to a very large extent become a European/international market. (…)

On the objectives to ensure sufficient transparency and shareholder oversight on directors' remuneration and related party transactions, the existing Member State rules in these areas are very different and as a result, they provide an uneven level of transparency and protection for investors. In both cases, the result of the divergence of rules is that investors are, in particular in case of cross-border investments, subject to difficulties and costs when they want to monitor companies and engage with them, and have no effective tools to protect their investments. (…)

Nevertheless, Member States should have a degree of flexibility as far as the transparency and information required in this proposal are concerned, in particular in order to allow the norms to adequately fit into the distinct corporate governance frameworks. To allow for such flexibility only some basic principles regarding shareholder identification, transmission of information by intermediaries and facilitation of the exercise of rights should be ensured. (…)

To this end, an amendment to the Shareholders Right Directive is the most appropriate legal instrument as it allows a certain flexibility for Member States, while at the same time providing the needed level of harmonization. Amending the Directive also ensures that the content and form of the proposed EU action does not go beyond what is necessary and proportionate in order to achieve the regulatory objective.

Strengthening the link between pay and performance of directors.

The proposal aims at creating more transparency on remuneration policy and the actual remuneration awarded to directors and creating a better link between pay and performance of directors by improving shareholder oversight of directors' remuneration. The proposal does not regulate the level of remuneration and leaves decisions on this to companies and their shareholders.

Articles 9a and 9b will require listed companies to publish detailed and user-friendly information on the remuneration policy and on the individual remuneration of directors, and Article 9b empowers the Commission to provide for a standardized presentation of some of this information in an implementing act. As is clarified in Article 9a paragraph 3 and 9b paragraph 1 all benefits of directors in whatever form will be included in the remuneration policy and report. The Articles give shareholders the right to approve the remuneration policy and to vote on the remuneration report, which describes how the remuneration policy has been applied in the last year. Therefore, such report facilitates the exercise of shareholder rights and ensures accountability of directors.

Box 5.3. A critique of the French Say on Pay system

By Professor Alain Pietrancosta as discussed in Say On Pay: The New French Legal Regime in light of the Shareholders’ Rights Directive II (Pietrancosta, 2017[15]).

France has thus decided to take the lead on this particular issue (apparently without a clear consciousness of doing so), by way of a pre-emptive over-implementation of the European Shareholder' Rights Directive, so as to transform a mere ‘say on pay’ into a real ‘decide on pay’.

Indeed, this combination of an ex ante binding vote, on the UK model, followed by an ex post binding vote, on the Swiss model, is rather unique and has consequently raised concerns from corporate practice. The French say on pay is accused of being excessively rigid and a new manifestation of needless red tape. Surely, the compulsory character of the ex post vote has been strongly criticised for weakening the remuneration packages offered by French listed companies, and as such creating a competitive handicap for them in the international market for top executives, and dispossessing the boards of their core legal power of setting the top executives’ compensation.

After all, the strong stance taken by the French lawmaker expresses a political choice that is hard to challenge on the grounds of legitimacy; although the disputed evidence of the economic efficiency of the say on pay tool weakens the case for such a stringent legal regime.

What is more difficult to understand is the failure to comply with other say on pay requirements contained in the European Shareholder' Rights Directive, as if the excessive focus on the legal nature of the ex-ante / ex-post votes had overshadowed aspects of the say on pay regime other than procedural. Such is the case for:

- the personal scope of application of the say on pay, the French one being more restrictive than the European one, which covers all members of the administrative, management or supervisory bodies of the company;

- the mandatory nature and the content of the remuneration policy, which is much more demanding, ambitious and results-oriented in the European directive;

- the ex post remuneration report, whose content is much more informative and meaningful in the Shareholder' Rights Directive.

As a result of these discrepancies, the brand new French say on pay mechanism must be significantly revised by June 10, 2019, an obligation to reform that is likely to be ill-received by some vested interests. Optimists may however see it as an opportunity to think about reversing some of the options retained in the Sapin II Law and to soften it with flexibility and proportionality elements, which can only be based on a more coherent and general vision.

The UK, which was among the first jurisdictions to adopt a say on pay mechanism, is one of them. In August 2017 Prime Minister May described how "in some companies executive pay has become disconnected from the performance of the company itself" (Department for Business, Energy & Industrial Strategy, 2017). Her government is asking the custodian of the UK Corporate Governance Code to make adjustments to its recommendations to encourage firms to simplify pay packages by increasing cash payments and limiting equity-based incentives to stock options with long vesting periods and selling restrictions.

France has recently approved a law (Loi Sapin 2) that introduces a new say on pay mechanism that amends the consultative mechanism France adopted four years ago and that is in line with the requirement of the amended EU Shareholders' Rights Directive. Under the new mechanism, an annual, ex-ante and binding vote, is due on the remuneration policy of the firm, while the remuneration report is subject to an annual, binding and ex-post vote. The remuneration report has to describe the remuneration (fixed, variable, and exceptional components) included in the total compensation (including benefits of any kind) paid or allocated in the prior year to each of the key executives3 (Box 5.3.). The first shareholders' votes under the new French system, applicable during a transition phase until 2018, have put CEO pay in a near rejection scenario in at least three large companies – one of those companies' CEOs had already had his remuneration rejected, albeit only consultatively, last year (Ana Lutzky, 2017).

The view of the G20/OECD Principles

The G20/OECD Principles address say on pay and the detail of disclosure of remuneration within Chapter II. It deals with the rights and equitable treatment of shareholders and key ownership functions and was subject to important revisions during the 2015 review. In section C.4. of that chapter it is stated that:

Effective shareholder participation in key corporate governance decisions, such as the nomination and election of board members, should be facilitated. Shareholders should be able to make their views known, including through votes at shareholder meetings, on the remuneration of board members and/or key executives, as applicable. The equity component of compensation schemes for board members and employees should be subject to shareholder approval (OECD, 2015).

The annotations further clarifies that the call for disclosure of remuneration of board members and key executives is justified by the need for shareholders to fully understand the remuneration policy and compensation costs to the firm, and how they link to company performance. The text makes a direct link between this investors' assessment and their general power to re-elect or nominate new members to the board if they are not satisfied with the results.

The annotations also address how the features of a say-on-pay mechanism may influence the ability of a firm's governance framework to reflect and react to the strength and tone of shareholder sentiment. Such features may include a binding or only advisory vote; a vote that takes place ex ante or ex post; a vote that affects the remuneration of key executives, the members of the board, or both; a vote that encompasses only the overall rules of the compensation policy or also set actual limits for remuneration, and a vote that may have effect over aggregates levels of executive compensation or also regarding the remuneration of specific individuals.

The main recommendations of Chapter II on the area of practice covered by the review are complemented by section D of Chapter VI., The Responsibilities of the Board, and section A.4. of Chapter V, Disclosure and Transparency.

Section D.4 of Chapter VI establishes that the board should fulfil certain key functions, including aligning key executive and board remuneration with the longer term interests of the company and its shareholders. For this, the annotations explain that it is regarded as good practice for boards to develop and disclose a remuneration policy statement covering board members and key executives. For large companies, best practices is described as having remuneration policy and contracts for board members and key executives handled by a special committee of the board, ideally composed of a majority of independent, non-executive directors.

In turn, section A.4. of Chapter V, Disclosure and Transparency, establishes that disclosure by firms should include, but not be limited to, material information on the remuneration of members of the board and key executives. The annotations on that section again make the link between remuneration and long term company performance, explaining that firms are generally expected to disclose this information so that investors "can assess the costs and benefits of remuneration plans and the contribution of incentive schemes, such as stock option schemes, to company performance". The annotations further describe that disclosure of remuneration on an individual basis (as opposed to overall figures encompassing all executives and/or board members as a group) "is increasingly regarded as good practice and is now mandated in many countries".

Flexibility and proportionality with respect to say on pay

As mentioned in the G20/OECD Principles' annotations cited above, there is a general trend in the direction of including say on pay mechanisms and rules regarding the disclosure of remuneration in the mandatory parts of national government frameworks. But as any intervention of this nature, these policies have a cost, mostly for the firms, but also for regulators and others. Some firms may already have detailed remuneration reports available and may be ready to discuss them with investors on a voluntary basis. Others may not. For them, these interventions have an effect and a cost. A case can certainly be made that the benefits for the firms outweigh the costs, as these practices will improve their governance framework. But the questions from a flexibility and proportionality perspective is what will be the effects of the intervention in the real world, for the heterogeneity of firms from different sectors and going through diverse stages of maturity at changing cycles within the economy.

A flexible and proportional approach allows for targeted interventions, which limit the risk of undesired side-effects. In the area of say and pay and the detail of disclosure on remuneration, it is not difficult to imagine, for example, that more detailed disclosure could increase a firm's exposure to third party hiring offers, if the level of remuneration it pays is below average. As mentioned, this can have the effect of pushing the remuneration average up. Likewise, the more power is transferred to shareholders in the setting of the remuneration, the weaker the board will be to recruit new managers. This could lead to the firm not having the best possible executive team.

In this perspective, the inquiry from a flexibility and proportionality approach is to asses when, for which firms and under which circumstances, a policy intervention may be appropriate. For example, does it make sense to adopt a say on pay binding vote in a company with a controlling shareholder that commands a majority of the votes? Maybe not, at least not in all circumstances. However, it may be useful for minority investors to receive detailed information on the compensation practices of the firm to assess the risk of abusive private benefits of control. Is it necessary to demand the same level of disclosure of remuneration to a medium sized company that wants to conduct an IPO as that which is demanded of a blue chip firm? Again, maybe not, because such imposition may add-up to other costs of going public and deter growth companies from accessing the equity market financing they may need to expand.

These are some of the issues behind the use of a flexible and proportional approach that this review is trying to capture. How jurisdictions use flexibility and proportionality criteria and mechanisms to ensure that their governance framework is fit for purpose. This chapter focuses only on regulations related to say on pay and the detail of disclosure of remuneration. It reflects how national policymakers aim to strike a balance between imposing costs on firms and the need to facilitate investor protection with voting rights and disclosure of compensation policies and practices, in a way that is conducive to investor confidence, monitoring, and sound governance. The next section presents the main results from the survey responses as to how this is implemented.

Survey results

Out of the 39 jurisdictions included in the survey, 31 reported at least one criteria or optional mechanism to allow flexibility and proportionality in the area of say on pay and the detail of disclosure on remuneration (Figure 5.3.)

Figure 5.3. Jurisdictions with at least one criteria or optional mechanism in the areas of regulation

Source: OECD Survey.

Looking at the frequency of use of the different criteria across the regulatory areas, Figure 5.4. shows that there were 9 jurisdictions that did not report using any criteria for flexibility and proportionality with respect to say on pay and the detail of disclosure on remuneration.

As described in the main chapter of this thematic review, among all the criteria that jurisdictions employ the most to promote flexibility and proportionality in their corporate governance frameworks, the criterion of listing/publicly trading and the criterion of size are by far the most used when considering all areas of practice. Aligned with the general results, the listing/publicly traded criterion is the most used in the area of say on pay and the detail of disclosure on remuneration, followed by size and legal form (Figure 5.4.). Figure 5.5 shows the frequency and distribution among different types of criteria that jurisdictions have reported.

Figure 5.4. Overall use of criteria across all areas of regulation

Source: OECD Survey.

Figure 5.5. Use of criteria for say on pay across jurisdictions

Source: OECD Survey.

The use of listing/publicly traded as criterion for flexibility and proportionality

Listing/publicly traded is used in the area of say and pay and the detail of disclosure on remuneration by 25 jurisdictions (about two thirds of participating jurisdictions) and is present in the corporate governance framework in several dimensions, with the listing level being the most common policy consideration (Figure 5.6.).

Most jurisdictions report that they use listing/publicly traded as a criterion in the sense that non-listed companies are not subject to the same disclosure or to the say on pay mechanism. Some discriminate between listing levels, establishing more stringent disclosure requirements for top levels. This is the case in Malaysia's Main and ACE markets, but not in its LEAP market. In Saudi Arabia's Main market the rules in this area of practice are mandatory while in the Nomu – or parallel – market they are voluntary. In Brazil, compensation disclosure requirements also apply differently for different categories of issuers, based on their listing level.

Figure 5.6. Use of the listing/publicly traded criterion for say on pay

Source: OECD Survey.

In other cases, obligations normally reserved to listed companies are extended to companies whose shares are traded, even if not listed. In Belgium, France and other EU member countries, a distinction is made not only in relation to if the company is listed or not, but also if its shares are traded in a regulated market. In Singapore, in turn, disclosure obligations are not applicable to firms that have a debt only listing.

Furthermore, in Australia, for companies listed in the ASX, their inclusion in the S&P ASX 300 index (determined by market capitalization) triggers the need to establish a remuneration committee that modifies the remuneration disclosure and setting regime applicable to listed companies in general.

The use of size as criterion for flexibility and proportionality

The 11 jurisdictions that reported using size as a criterion for flexibility and proportionality regarding say on pay and the detail of disclosure on remuneration report using different dimensions of it. Size of revenues, size of assets and size of workforce are the more frequently used (Figure 5.7.).

Figure 5.7. Use of the size criterion for say on pay

Source: OECD Survey.

In the case of Italy, for example, the law mandates Consob, the securities regulator, to establish the detail of disclosure of remuneration policy and practices that firms must present in their remuneration report. The law allows Consob to differentiate the detail of disclosure according to the size of the firm (article 123ter, para. 8, of the Consolidated Law on Finance). Consob has used this power to regulate that smaller companies can provide a simplified report using aggregated instead of individual data, among others.

In Slovenia, companies are required to submit a report to the shareholders' general meeting on the remuneration received by the management and the board in the past financial year, including information about the company's subsidiaries. These reporting requirements are reduced for SMEs which are only required to disclose simplified information in the notes to their financial statements (article 294(5) of the Companies Act).

In Korea, the size of the remuneration may determine the detail of disclosure. Listed companies disclose executive pay and stock options in their business report but only when the remuneration of an executive exceed a stated amount (500 million won) the disclosure has to be individual instead of aggregated (article159-2(3) Financial Investment Service and Capital Markets Act). A similar rule applies in Japan under the Financial Instruments and Exchange Act when the total compensation of an executive exceeds 100 million yen (about USD 900 000 by June 2018).

The use of the legal form as criterion for flexibility and proportionality

The legal form criterion is used in Mexico, for example, where two distinct legal forms admitted to listing have differentiated requirements. Sociedades Anónimas Bursátiles (SABs) and Sociedades Anónimas Promotoras de Inversión Bursátil (SAPIBs), are two different legal forms that can be adopted by companies that want to list their shares, with the latter form being a vehicle to facilitate IPOs of SMEs. Because of this, SAPIBs are subject to a lighter-touch detail of disclosure, although the approval of compensation practices by shareholders is the same for both types of firms.

The use of other criteria for flexibility and proportionality

Maturity of the firm, ownership/control structure and accounting standards are rarely used in the regulation of say on pay and detail of disclosure on remuneration. Israel, for example, considers the maturity of the firm, defined as the years passed since the IPO, to determine when the company has to get shareholders' approval to its remuneration policy. For newly listed companies it is within five years after the IPO (if the prospectus included information about the remuneration policy) while for the rest the requirement applies every three years. The remuneration disclosure requirements under the Danish Financial Statements Act consider the accounting standards used as a criterion to determine the disclosure obligations of firms. Small companies that use IFRS only have to disclose remuneration information in their financial statements and not pursuant to the rules of the Act.

Other criteria were also mentioned by respondents, beyond those listed in the survey. These included the number of shareholders and the amount of stated capital (Japan); the qualification of the company as public interest entity (Portugal); the existence of a takeover bid (Ireland), and the passing of a shareholders' resolution (UK).

In the United States, which is the jurisdiction that reported the highest use of flexibility and proportionality criteria in this area, the general say on pay rules are in place since 2011. They establish that public companies subject to the Exchange Act rules governing proxy solicitations must provide shareholders with an advisory vote on the compensation of selected executives not less frequently than once every three years. In a separate advisory vote, which must be held at least once every six years, shareholders can vote on how often a say on pay vote should occur (every one, two, or three years). Both decisions by shareholders are advisory votes, so neither the say on pay nor the vote on frequency is binding on the company. This general say on pay regime in the United States is adjusted in terms of flexibility and proportionality in several circumstances, including:

  • Emerging growth companies: Under the JOBS Act these companies are not required to conduct shareholder advisory votes as long as the company remains an emerging growth company, which generally is defined in relation to total annual gross revenues below USD 1.07 billion during the most recently completed fiscal year.4

  • Foreign private issuers: Securities registered by some foreign private issuers are not subject to the say on pay or the say on frequency votes.

  • Private placements: If a company has registered securities under Section 12 of the Exchange Act, it must comply with the shareholder advisory votes described above unless it satisfies one of the exceptions described above. Companies that are not subject to Section 12 and private companies are not required to do so.

  • Multiple class shares with no voting rights: Issuers with multiple classes of shares where the listed (or publicly held) shares do not have voting rights are not subject to the shareholder advisory votes described above.

  • Debt only listing: Companies that have only listed debt securities are not subject to the shareholder advisory votes described above.

Similar exceptions apply to the compensation disclosure regime in the United States, except that multiple class share companies with no voting rights and companies with debt only listings are required to provide full compensation disclosure unless they may rely on another exception.

The use of opt-in and opt-out mechanisms for flexibility and proportionality

Opt-in and opt-out mechanisms are used for say on pay and the detail of disclosure on remuneration only by 13 jurisdictions (Figure 5.8.). Germany, for example, uses an opt-out mechanism that allows firms to omit certain remuneration disclosures in their financial statements if shareholders representing 3/4 of the share capital agree to it.

Figure 5.8. Use of opt-in and/or opt-out mechanisms for say on pay

Source: OECD Survey.

The use of sectoral criteria for flexibility and proportionality

An analysis of the results per sector of activity reveals that flexibility and proportionality criteria for say on pay and the detail of disclosure on remuneration are used in a majority of jurisdictions (24), with a varying degree of scope (Figure 5.9.). Most jurisdictions that present flexible sectoral regulations report having special regimes for the financial sector and for their State-owned companies.

Figure 5.9. Use of flexibility and proportionality in different sectors for say on pay

Source: OECD Survey.

Case study: Sweden


This case study describes the regulation on say on pay and disclosure on remuneration policies in Sweden's corporate law and the flexibility and proportionally mechanisms therein. It is structured in three parts. In part one, the Swedish law and practice on say on pay is presented, with special attention paid to the extent to which the law allows for flexibility and proportionality. Part two offers the background related to the motives and circumstances behind the introduction of the say on pay regulation in Sweden and its development until present day. The case study is summarized in part three, with a discussion of the political economy and results of the reform, and its effects on remuneration of board members and management.

Description of law and practice

The sources of regulation and practice

The Swedish statutory regulation of shareholder influence on remuneration policies is primarily found in the Swedish Companies Act (2005:551),5 with some additional regulation notably to be found in the Annual Accounts Act (1995:1554).6 The statutory regulation is supplemented by the Swedish Corporate Governance Code ("the Code") issued by the Swedish Corporate Governance Board7 and the rulings by the Swedish Securities Council ("the Securities Council"), a self-regulatory body tasked with interpreting the Code.8 In the following sections, the contents of the statutory regulation, the Code, and finally the Securities Council's rulings are presented. The flexibility and proportionality mechanisms present in the different sources of law are given an extra focus and are discussed continually in the text.

The content of the statutory regulation

The say on pay regulation in the Swedish Companies Act governs the decision-making procedures regarding remuneration of directors and executives. Rather than putting up a substantive regulation, creating and defining quantifiable limitations on remuneration decisions, the purpose of these rules is to give shareholders control over, and transparency, with regards to the remuneration levels of the company's board of directors and executive managers. Thus, the Companies Act prescribes that it is the general meeting that decides on remuneration and incentive schemes9 for the board of directors (Chapter 8, section 23a of the Companies Act). The decision is passed with simple majority (more than half of the votes cast) and is usually based on a proposal from the nomination committee.10

Regarding the remuneration of the board of directors, there are no flexibility and proportionality mechanisms – a general meeting decision is always required, without any regards to if it is a private company11 or a public and listed company.12 For the remuneration of the management in companies with shares listed on a regulated market,13 the general meeting must pass a resolution on remuneration guidelines prepared annually by the board of director (Chapter 7, section 61 and Chapter 8, section 51 of the Companies Act).

If the amount of remuneration is not fixed, the guidelines must specify the nature of the remuneration, the conditions under which it is payable, and an estimated total cost for the company's obligations, given different conceivable outcomes (Chapter 8 section 52 of the Companies Act). The guidelines may also provide that the board of directors may deviate from the guidelines if there are particular reasons for doing so in an individual case (Chapter 8 section 53 of the Companies Act), which in a sense is a flexibility mechanism. The same can be said regarding the policy choice for a 'guideline' format instead of more detailed decisions, which gives the board the possibility to adjust its decisions. As stated above, the rules regarding remuneration guidelines are also a proportionality mechanism as they apply only to companies listed on regulated markets.

The guidelines are required to be passed by the general meeting in companies listed on regulated markets and shall relate to all forms of remunerations and incentive schemes, such as salary, provisions, pensions, bonuses, profit shares, benefits, synthetic options and employee stock options.14 This requirement also pertains to subsidiaries to public companies, whether these are public or private.

Finally, there is a duty for companies listed on regulated markets to inform about the latest remuneration guidelines in the management report in the annual accounts (Chapter 6 section 1a in the Annual Accounts Act). 15

The content of the Code

In addition to the statutory regulation described above, the Swedish Corporate Governance Code contains some requirements that further add to and complement the law. The Code has one major proportionality mechanism in that it only applies to companies listed on regulated markets, and one general flexibility mechanism in that it applies to these listed companies under a "comply or explain" regime, in effect allowing companies to "opt-out" of the application of the Code.16

The requirements on remuneration are found in section 9 of the Code. According to this section, companies listed on regulated markets are to have a formal and openly stated process for deciding on remuneration of members of the board and the management. The board also has to have a remuneration committee, responsible for preparing the remuneration guidelines required by the Companies Act, as described above, as well as for monitoring and evaluating variable remuneration schemes and following up on the effectiveness of the remuneration guidelines, and remuneration structures and levels in the company.

The chair of the board may be the chair of the remuneration committee while the other members are to be independent of the company as well as the management, so that the committee is composed in a way that ensures the independence and integrity of its work.17

The Code's requirement for a formal and openly stated remuneration process and the requirement for a remuneration committee resemble the regulation in the Companies Act in that they mainly are procedural rules for the decision-making on remuneration. In a similar manner, the Code also prescribes that all equity based and share-price related incentive schemes for the management are to be adopted by the general meeting, and that incentive schemes designed for board members are only to be devised by the shareholders themselves (not by the board, management or other employees of the company).

However, the Code also contains a few rules of a more substantive nature. These include that variable remuneration is to be linked to predetermined and measurable performance criteria aimed at promoting the company's long-term value creation and that variable remuneration paid in cash is to be subject to predetermined limits regarding the total outcome; that equity based and share-price related incentive schemes are to be designed with the aim of achieving increased alignment between the interests of the participating individuals and the company's shareholders; and that fixed salary during a period of notice and severance pay are together not to exceed an amount equivalent to the individual's fixed salary for two years.

Rulings of the Securities Council

Finally, the applicable statutes and the Swedish Corporate Governance Code are supplemented by rulings of the Swedish Securities Council. The tasks of the Council includes to interpret the Code and review attempts to circumvent the provisions of Chapter 16 of the Companies Act and determine in which cases the principles set out in chapter 16 should be applied (as a matter of best practice) even if not directly applicable.18

Over the years, the Securities Council has given many rulings regarding what is generally acceptable with regards to remuneration policies and especially equity based incentive schemes with regards to Chapter 16 in the Companies Act. By 2002 the rulings had become so numerous that the Securities Council decided to replace the previous individual rulings with a new so-called principal ruling, Council ruling 2002:01.

The 2002:01 ruling, together with the roughly 40 rulings regarding incentive schemes given by the Council since then, is a principal source of law regarding incentive schemes for executives and board members, and say on pay. While the Companies Act provides the general procedural rules regarding decisions on remuneration, and the Code complements the Act with some additional procedural rules as well as some substantive recommendations, the Securities Council's rulings add quite a few more detailed substantive and procedural provisions not further described here. However, in relation to flexibility and proportionality, a few examples are appropriate to illustrate the Securities Council's rulings' supplementary relationship to Chapter 16 of the Companies Act and the provisions of the Code regarding equity-based incentive schemes.

The Securities Council's rulings widen the above-mentioned rules to include, in addition to equity-based schemes, related types of schemes such as those based on synthetic options. They also broaden the group of related parties that are affected by Chapter 16 to include not only directors, executives and other employees of the company, but also those about to take such positions. They put extensive restrictions on the board of directors to participate in equity-based schemes, and address several of the various ways of circumventing Chapter 16 as infringements of best stock market practice. The Securities Council also gives more specific directions regarding which information that is to be given to shareholders before an upcoming general meeting where resolutions regarding incentive schemes are to be passed.

As opposed to the Code, the Securities Council's rulings are applicable to all companies listed on alternative trading platforms as well as regulated markets, but not to unlisted companies, which can be considered a proportionality criterion. And while the Securities Council rulings provide the most substantive regulation, compared to the Code and the Companies Act, a flexible and functional regulatory method is applied in the rulings. Ruling 2002:01 provides a good example of this, where the Securities Council, addressing the size of the remuneration, states that "it is important that the size of the remuneration is reasonable", but that in the end what is best practice and a reasonable remuneration size has to be something for "the shareholders to decide with regards to the company size, international expanse, and competition."

The motives, circumstances and political economy

The Swedish corporate governance model and say on pay

The Swedish corporate governance structure is based on some distinctive features, one of them being that the shareholders hold nearly omnipotent power over the board of directors and the management, and that (although uncommon) the owners may intervene in virtually any matter through general meeting resolutions. Furthermore, since most of the listed companies in Sweden directly or indirectly have one or several block holders that actively engage in the administration and management of the company, there is little room for the directors or the management to act in their own self-interest instead of in the shareholders' interest. In other words, the principal-agent problem is not a central issue in Swedish corporate governance and therefore not an issue for the Swedish legislator. Because of this, say on pay discussions have never really been a natural part of the Swedish debate on corporate governance in the way that it has been in the Anglo-American corporate governance model.

The "Leo-case" and its legal implications

The springboard for the regulation described in part one was the so-called "Leo-case". The Leo-case consisted of a series of stock trading deals with insiders in 1983 in the pharmaceutical company Leo AB, a subsidiary to Wilh. Sonessons AB, which at the time was listed on the Stockholm Stock Exchange. A select inside circle of some thirty business executives (consisting of board members in Leo, Wilh. Sonessons AB, and senior executives in Volvo AB) were offered preferential share purchases in Leo at a price of SEK 50.60 in a directed share issue taking place one year before Leo's IPO. The price in the subsequent IPO was SEK 75.00. The number of shares offered to this inside circle was considerable.

When the circumstances were revealed a year later it immediately blew up into one of the largest scandals in Swedish business history. The scheme was not only deemed as a case of abuse of the minority shareholders, but because of its proportions and the public exposure of the companies and officials involved, it was also perceived as exceedingly damaging for the public's trust in the Swedish enterprises and industry. By order of the Prime Minister, a public investigation was launched to determine what measures should be taken to prevent further incidents of the sort.

The investigation group was named "the Leo Commission", and the initial directive for the commission was to propose a legal ban on directed share issues to board members and management of listed companies. However, the Stockholm Stock Exchange, together with the Swedish Industry and Commerce Stock Exchange Committee, pre-empted any legislative efforts to ban directed share issues by adopting self-regulatory measures. They released principles of best practices for the Swedish stock market that addressed directed share issues, and more importantly, formed the Securities Council with the purpose to govern and cultivate these best practices and discipline companies which would not follow them. The Leo Commission and the legislator chose to simply complement the self-regulation with the so-called Leo Act, which was subsequently incorporated into the Companies Act 2006 with some minor changes, becoming Chapter 16 of the Act, discussed above. In addition, in 1993 the Swedish Industry and Commerce Stock Exchange Committee released a recommendation regarding the disclosure of remunerations of directors and executives in listed companies, with requirements inspired by the Cadbury report. Briefly summarized, the recommendation stated that the individual remunerations of the chairman of the board and the managing director were to be disclosed in the annual accounts, together with a general, non-individual description of the agreements on severance pay and pensions for other management and executive employees.19

After the Leo case, not much was done in the area of management remuneration and say on pay by the legislator. The activity of the Securities Council has effectively addressed new issues regarding remuneration schemes, and the best practices promoted have been generally followed by the market actors in the interest of and preference for a well-functioning self-regulation over a more rigid legislative approach. Thus, there has been no need for further legislative initiatives.20

The introduction of the Swedish Corporate Governance Code

It was not until the introduction of the Swedish Corporate Governance Code in 2005 that the next major step in the area was taken. This took place in the context of the introduction of national corporate governance codes and regulations around the world. As a result, concerns were raised in the public discussion that the Swedish corporate governance system might become questioned and challenged by international investors, thereby limiting the flow of international capital to Sweden, if Sweden would not get on the bandwagon and adopt a national code of its own.

To address these concerns, a new government commission was established in 2002 and given the task to propose measures that would strengthen the trust for the Swedish corporate governance system and Swedish enterprise and industry at large. The commission was named "the Trust Commission". In its work, the Trust Commission considered the choice between legislation and self-regulation as different approaches to strengthening the trust in the Swedish corporate governance system and Swedish industry. While acknowledging the advantages of legislative measures, such as democratic basis and legal certainty, the Trust Commission concluded that the flexibility and efficiency of the already well-functioning self-regulatory approach was a better choice for adapting the Swedish regulation to the international practice of governance codes.

Thus, partially consisting of members from the Trust Commission, the so-called Code Group was formed in 2003 to draft a national corporate governance code with inspiration from international practice, in particular the British code. The Code, which came into force in 2005, contained an opt-out option as it is applied under a 'comply or explain' regime.

However, unlike today's Code, which is applicable to all companies listed on regulated markets, the Code of 2005 only applied to companies with a market value over 3 billon SEK (roughly EUR 300 million). At the time of the Code's introduction, this meant that the Code was applicable to roughly 100 of the largest companies listed on the Stockholm Stock Exchange. This limitation was not intended to be permanent but rather seen as a proportionality mechanism through which the largest companies, deemed to be best equipped to comply with the Code and to set practice in its application, would lead the way. In 2008 the scope of the Code was broadened to include all companies listed on regulated markets.21

Another difference between the original Code of 2005 and today's Code is that since the first version in many ways was a synthesis of a variety of international sources, it was fairly detailed in comparison with today's Code. This also applied to the rules on management remuneration, as it basically contained the rules now found in Chapter 8 of the Companies Act.22

The Code was not that fondly received by market participants in 2005. In some parts, the Code was deemed too rigid and detailed for a Swedish context, while in others too soft to achieve the explicit goal of giving more credibility to the Swedish corporate governance regulation. As a result of the view that some parts of the Code were too rigid, it was considerably condensed in 2008 to the briefer form we know today. A discussion also followed between the market participants, the legislator and the Swedish Corporate Governance Board (that by this time had been entrusted with the administration of the Code) regarding the rules on remuneration guidelines, which were found to be too soft. This dialogue led to the adoption of the rules in the Companies Act, already described.

Following this change in 2008, the Code was left with no regulation regarding say on pay at all until the rules in the present Code's Section 9 (regarding remuneration of the board and management) were introduced in 2010. These rules were added to the Code to accommodate the European Commission's recommendation 2009/3177/EC (regarding the regime for the remuneration of directors of listed companies).23

The political economy and effects of the regulation in Sweden

As seen in the description of the Swedish say on pay regulation, the apparent flexibility and proportionality mechanisms in this regulation are the restriction of the application of most of the rules to listed companies, the exclusion of private companies from provisions in the Companies Act on remuneration, and the 'comply or explain' regime of the Code.

It would, however, be a too confined perspective, and therefore misleading, to emphasize these as the most important flexibility and proportionality mechanisms in the Swedish corporate governance framework. Rather, what creates the key flexibility and proportionality element is the system in and of itself, particularly because of the close interplay between the market participants, the self-regulatory bodies (which are composed of representatives from the different market actors), and the legislator. Above, we have given several examples of the system's flexibility and the interplay between the actors at work.24

The Securities Council's development of the rules regarding share-based incentive schemes should also be mentioned as an example of the system's flexibility. With regards to how the Council's interpretation of the Code, the Companies Act and best practice together with its short processing time (in general announcing a ruling within a week when a query has been presented before the Council) and the almost unwavering adherence to the Council's rulings, the Council plays a key role in keeping the Swedish corporate governance framework fit for purpose.

These finer aspects of the Swedish framework are far harder to capture and explain than the more apparent legal mechanisms even though they, combined, are among the most important factors in the framework. It is even more difficult to explain why and how they are so efficient, although the answer at least partially lies in the fact that the Swedish stock market and business sector by all measures, and even considering globalisation, still is a small and relatively limited community with tight connections.

With this in mind, it is not very surprising that the EU say on pay regulation has not been received with much enthusiasm in Sweden. The conventional wisdom seems to be that the introduction of some of the provisions and regulations described here has been encumbering to the inherent system flexibility. For instance, the requirement for the general meeting to resolve on management remuneration guidelines introduced to the Code in 2005 and the Companies Act in 2008 rather seems to have made the remuneration system less flexible, since a standard practice quickly evolved around these guidelines amongst companies that now present documents of very similar content.

As far as the remuneration levels are concerned, little and inconclusive empirical research has been carried out in Sweden, but the experience again seems to indicate that the rules have had none or just marginal effects.25 This might not be that surprising considering that, as discussed, remuneration levels have never really been a big problem in Sweden (in comparison to for instance in the UK and the US) and that the rules were adopted mainly as efforts towards aligning the Swedish corporate governance framework with international standards.

Partially, this might be credited to the shareholder-centric corporate governance system, where the shareholders decide on the board and management remunerations, and where the board, by law, is entirely separated from the management. Another factor is probably the long tradition of egalitarian values, with homogenous societal norms that keep the remunerations at what is considered to be acceptable levels. This effect might be particularly strong due to the closeness of the business community, where deviations from what is considered to be the standard practice are quickly noticed and identified both by the community itself and the public media.

Of course, large parts of the regulation and legal mechanisms that have been described above have had a highly positive impact on the Swedish corporate governance framework. For instance, the Leo Act covered the important area of share-based incentive schemes that obviously required the legislator's attention. The creation of the Securities Council was also a success that became an indispensable asset to the Swedish stock markets. However, neither the Leo Act nor the Securities Council are say on pay mechanisms in a conventional sense. The Leo Act is rather a form of protection of minority shareholders, addressing the more specific problem for the Swedish system of balance of power between majority and minority shareholders predominant in Swedish corporate governance (Lekvall et al., 2014, pp. 18-19[17]). The Securities Council is in a similar manner a construction that fits well into the flexible self-regulatory body, building on its strengths.

To sum up, the main point is not to suggest an export of the Swedish approach to the rest of the world, but rather the opposite. When it comes to corporate governance there is no "one size fits all". This is at the centre of this exercise on flexibility and proportionality. The strive for international uniformity, even when driven by the desire to advance the international corporate governance agenda and to endorse cross-border engagement and capital flow, might be best served by a flexible and proportional adaptation to local features of each jurisdiction. We should aim to strike a balance, respecting the advantages of different corporate governance models and what makes them successful in their own context.


The survey results show that flexibility and proportionality are used by a large number of jurisdictions for the implementation of say on pay and the disclosure of remuneration. Similar to other areas of regulations, listing status is the most used criterion for flexibility, followed by size – mainly of revenues and workforce – and legal form.

The issues addressed by this area of practice, mainly a concern about levels of executive compensation and their misalignment with the long-term interest of the company, remain highly disputed even in jurisdictions that were early adopters of say on pay mechanisms and have detailed compensation disclosure regimes.

As demonstrated by the Swedish case study example, many jurisdictions that did not have an out-of-control executive pay problem (or perception of a problem in their public opinion) have introduced both the disclosure and say on pay mechanisms. This is not only a result of the power of the EU that thrusts convergence of legislation among member countries, but also the perception of jurisdictions that their governance framework may be perceived as incomplete, and therefore more risky by international and institutional investors, in the absence of such mechanisms.

A flexible and proportional approach, rooted in the particular features of the national corporate governance, offers jurisdictions an opportunity to present a corporate governance regime that is not only updated to the latest policy tools, but also fit for the challenges it actually faces locally, as well as tailored to the needs of a diverse pool of firms across the market.


Ana Lutzky (2017), “Say on pay : que faut-il retenir de la saison 2017 des AG du CAC 40 ?”,

Bebchuk, L. and J. Fried (2004), “Pay without Performance, The Unfulfilled Promise of Executive Compensation, Part II: Power and Pay The Unfulfilled Promise of Executive Compensation”,

Correa, R. and U. Lel (2016), “Say on pay laws, executive compensation, pay slice, and firm valuation around the world”, Journal of Financial Economics, Vol. 122, pp. 500-520,

Gabaix, X., A. Landier and J. Sauvagnat (2013), “CEO Pay and Firm Size: an Update after the Crisis ”,

Gao, H. et al. (2015), “Effects of Managerial Labor Market on Executive Compensation: Evidence from Job-hopping”, Journal of Accounting and Economics,

IRRC & ISS (2016), Controlled Companies in the Standard & Poor’s 1500: A Follow-up Review of Performance & Risk,

Lekvall, P. et al. (2014), The Nordic Corporate Governance Model,

OECD (2010), Corporate Governance and the Financial Crisis: Conclusions and emerging good practices to enhance implementation of the Principles,

OECD (2011), Board Practices: Incentives and Governing Risks, OECD Publishing, Paris,

OECD (2015), G20/OECD Principles of Corporate Governance, OECD Publishing, Paris,

OECD (2017), “OECD Corporate Governance Factbook 2017”,

Pietrancosta, A. (2017), Say on Pay: The New French Legal Regime in Light of the Shareholders’ Rights Directive II,

Thomas, R. and C. Van der Elst (2014), “Say on Pay Around the World”, SSRN Electronic Journal,

UK Department for Business, Energy & Industrial Strategy (2017), Corporate Governance Reform: The Government response to the green paper consultation,


← 1. The Committee addressed these issues in its 2010 report on the lessons from the financial crisis.

← 2. "For example, in Austria, the law requires that the remuneration of board members must be commensurate with their responsibilities and scope of work as well as the economic situation of the company. In Hong Kong, China, the Code recommends that a significant portion of executive directors’ remuneration be linked to corporate and individual performance. The Norwegian Code, on the other hand, recommends that the company should not grant share options to board members, and that their remuneration not be linked to the company’s performance. In Turkey, listed companies are required to have a remuneration policy to be approved at the general shareholders meeting and disclosed on the company website, and dividends, share options and performance-based plans are not allowed for independent board members".

← 3. If the ex-post vote results are negative, fixed compensation elements are not called into question but variable or exceptional items allocated to the executive cannot be paid until the total remuneration is approved by the general meeting at a later vote.

← 4. Firms may lose their status after five years, if they become a large accelerated filer or issue more than $1 billion of non-convertible debt in the previous three years, among other conditions.

← 5. Mainly in Chapter 7 section 61; Chapter 8 section 23a and 51-53; and in Chapter 16.

← 6. Mainly in Chapter 6 section 1 a.

← 7. The Code is a fundamental part of the self-regulation of the Swedish stock market, and it is considered to be a codification of best practice in Swedish corporate governance. All companies whose shares or depositary receipts are listed on a regulated market in Sweden (at present, the Nasdaq Stockholm main market and NGM Equity) are required under the listing rules to apply the Code (as a key component in complying with best practice) in their corporate governance practices.

← 8. The Securities Council’s rulings are in effect binding on the listed companies on the same grounds as the Code, since they are considered to be expressions and interpretations of best stock market practice. However, whereas the Code’s applicability is limited to companies listed on regulated markets, the Securities Council’s rulings are also applicable to companies whose shares or depositary receipts are listed on multilateral trading facilities (at present, First North, Nordic MTF and Aktietorget).

← 9. For equity based incentive schemes, see the section below regarding Chapter 16 of the Companies Act.

← 10. The Swedish nomination committees usually consist of representatives from the three to five largest shareholders of the company and the presiding chairman. The Code requires that the nomination committee is independent from the presiding board and the management of the company (see section III.2 of the Code).

← 11. That is, the Swedish company form generally chosen for closed companies, where the company shares may not be offered to the public.

← 12. The alternative that the board decides on its own remuneration would be considered self-dealing under Swedish company law.

← 13. The management includes senior executives such as the chief financial officer, the chief HR officer, and business managers.

← 14. However, directed equity schemes are exempted. They are instead governed by Chapter 16 of the Companies Act which requires that directed issuance of shares, warrants or convertibles to the directors, executives or employees in a public company , i.e. equity based incentive schemes, must be approved through a resolution by the general meeting (Chapter 16 section 2 of the Companies Act). A general meeting resolution in accordance with Chapter 16 is valid only if it is supported by shareholders holding at least nine-tenths of the votes cast and the shares represented at the general meeting (Chapter 16 section 8 of the Companies Act). The element of flexibility and proportionality in Chapter 16 consists in that the scope of the chapter is limited to the public company form. Since the public company form is a requirement for listing on multilateral trading facilities as well as on regulated markets, the chapter de facto pertains to all listed companies, and the proportionality lies in the fact that private companies are not required to follow the rules regarding equity based incentive schemes.

← 15. If an issuance has been carried out and required the approval of the general meeting in accordance with Chapter 16, information about the result of said action must also be presented in the management report (Chapter 16 section 10 in the Companies Act).

← 16. In practice, one third of the companies listed on regulated markets deviate from the Code in one or several regards (according to the 2017 statistics). The number of companies deviating from the Code has been decreasing over the years.

← 17. The determination of independence is a general assessment of all factors that may give cause for questioning the individual’s independence and integrity with regards to the company or its management, and in section 4.4 of the Code, a guide to the independence assessment is provided.

← 18. The Council does not interpret legislation, since this is a matter for the courts. Thus, actions that are directly covered by Chapter 16 in the Companies Act are not subject to the interpretation of the Council.

← 19. These rules were tested in the spring of 2002, when it came to the public’s attention that the chairman of ABB had received an EUR 100 million pension agreement (by all standards a high level, and especially so in a company that at the time had very strained finances). Since the 1993 recommendation only applied to Swedish companies, the remuneration levels of the Stockholm-listed but Swiss company ABB came as a surprise. The Swedish Industry and Commerce Stock Exchange Committee reacted quickly and six months later a revised recommendation was released, which among other changes now covered foreign companies listed in Swedish stock markets.

← 20. Put in the flexibility and proportionality perspective of this review, the stock market in Sweden was left unattended to by the legislator during the period since it was recognized that the self-regulation through the Securities Council and the Swedish Industry and Commerce Stock Exchange Committee provided efficiency and flexibility that might only have been damaged if meddled with through legislation.

← 21. The question was later raised if the scope of the Code’s application should be extended even further to cover companies listed on the exchanges organized as multilateral trading facilities as well. The exchanges themselves, however, strongly opposed this idea, claiming that the Code’s requirements would be disproportionately strenuous to such companies. However, since then a middle segment has been created on the multilateral trading facility Nasdaq First North Premier. Premier’s listing requirements are a compromise between those of the regular multilateral trading facility list First North and the regulated main market listing, including a recommendation for the listed companies to apply the Code. This provides a mechanism of flexibility through which companies not yet qualified or ready to list their shares on a regulated market have a clearly appointed way to “opt-in” to the application of the Code.

← 22. The guideline rules were also more detailed originally, requiring that the guidelines were to include the ratio between fixed and variable remuneration and the connection between performance and remuneration; the main terms for bonus and incentive schemes, main conditions for non-monetary benefits, retirement, and severance pay; as well as the circle of executives included. The guidelines were also to inform of any significant deviations from previous years’ guidelines.

← 23. The 2009 recommendation was however deemed far too detailed and ambitious to be implemented to the letter since it was founded on a different view on corporate governance regulation, and thus the more flexible version that has been described above was enacted. Together with the Code’s ‘comply or explain’ regime, this was held as a compromise between an adaption of the 2009 recommendation and the Swedish model of corporate governance, and the draft of the expansion was described as “A balance between Sweden on the one hand being a good EU-citizen and on the other the Swedish companies and their owner’s need for a [corporate governance] solution that works here [in a Swedish context].” Note: free translation of a passage in a letter from the Swedish Corporate Governance Board published in the national Swedish newspaper Dagens Industri on October 27, 2009 regarding the adaption of the Code with regards to the 2009 recommendation.

← 24. These include: i) the instalment of the Securities Council as a self-regulatory response to the Leo; ii) the quick introduction and revision of the recommendations regarding disclosure of remunerations to directors and executives as responses to public opinion; iii) the revision of the Code to adapt it to the Swedish system, as well as the legislator’s incorporation of the rules on remuneration guidelines in the Companies Act on request by private actors to strengthen the appearance of the Swedish corporate governance framework; iv) how it was a result of dialogue between the Swedish Corporate Governance Board and the exchanges themselves not to apply the Code to the companies listed on multilateral trading facilities; and v) how the market actors dodged legislative action by incorporating the 2009/3177/EC recommendation into the Code.

← 25. At least not a positive effect – the general experience rather seems to be that the introduction of the requirements to disclose the remunerations of directors and executives has led to an increase in remuneration levels. Thomas & Van der Elst, 2014, seems to support this experience.

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