Say on ESG: The Adoption of Say-on-Pay Laws, ESG Contracting, and Firm ESG Performance

Concurrent with greater investor focus on ESG performance is the increasing use of ESG-related contracting metrics in executive compensation contracts. We investigate these two related issues in the context of the adoption of Say-on-Pay (SOP) voting laws, which give investors a direct voice in compensation and an additional way to express their preferences. Exploiting the staggered adoption of SOP laws around the world, we document an increase in ESG contracting and a subsequent improvement in ESG performance after the adoption. The improvements in ESG performance are concentrated in firms that adopted ESG contracting, suggesting that ESG contracting is a pathway to facilitate better ESG performance. ESG contracting matters more when SOP voting is likely to have greater influence, including firms that face high initial SOP voting dissent and when votes are binding. Lastly, we show that the ESG contracting contributes to the positive effect of SOP laws on shareholder value.