Tuesday, April 10, 2012

Proxy Advisers' Influence on Say-on-Pay: Additional Data and Insights

Two new studies examine the influence proxy advisory services like ISS and Glass-Lewis have on the outcomes of proposals made to shareholders in firms' annual proxies, particularly say-on-pay votes, which became mandatory for most public companies in 2011.  Both studies look at the data behind the level of influence ISS and Glass-Lewis have on proxy voting outcomes, but they also look at the extent to which these voting recommendations may affect market reactions and change the way in which executive compensation packages are designed.

In their March 7, 2012 paper, Shareholder Votes and Proxy Advisors: Evidence from Say on Pay, Yonca Ertimur of Duke University, Fabrizio Ferri at Columbia Business School, and David Oesch of the University of St. Gallen examine the data underlying the voting recommendations issued by Institutional Shareholder Services (ISS) and Glass Lewis & Co. (Glass-Lewis), the two most influential proxy advisors, for the non-binding proxy votes on "say on pay."  The academics take the analysis a step further by also investigating the effect of these recommendations on shareholder votes, stock prices and firm’s behavior. Say on pay votes provide an especially powerful setting to examine the analyses performed by proxy advisors and their effects on firm and market behaviors.


We study the role of proxy advisors (ISS and Glass Lewis & Co.) in the context of mandatory “say on pay” votes, a novel and complex item requiring significant firm-specific analysis. After describing the analysis underlying each proxy advisor’s recommendations, we examine the effect of these recommendations on shareholder votes, stock prices and firms’ behavior. As in prior studies, negative recommendations have a strong association with voting outcomes, but the effect varies with the reasons behind the recommendation. We document a small but significantly negative market reaction to the release of negative recommendations. More than one third of the firms receiving a negative recommendation publicly question the proxy advisors’ methodologies, but this protest has no effect on the recommendation and the voting outcome. The few firms that change their compensation practices obtain a revision in the recommendation and avoid voting dissent. We also present novel evidence on the (substantial) influence of management recommendations on shareholder votes in the context of the “say when on pay” vote, i.e. the vote on whether to hold say on pay votes every one, two or three years. 

David F. Larcker, Allan L. McCall, and Brian Tayan of the Conference Board take a different approach to the effect of ISS and Glass-Lewis say on pay recommendations. In their publication, The Influence of Proxy Advisory Firm Voting Recommendations on Say-on-Pay Votes and Executive Compensation Decisions, the authors examine how these recommendations may affect the design of executive compensation packages. 

A growing body of evidence demonstrates the influential role that third-party proxy advisory firms play in affecting the voting outcome of proposals made to shareholders in the annual proxy, particularly say-on-pay votes, which became mandatory for most public companies in 2011. There is less evidence, however, to establish the extent to which companies respond to this influence by changing the size and structure of executive compensation plans to conform to proxy advisor voting polices. A recent study conducted by The Conference Board, NASDAQ, and the Rock Center for Corporate Governance at Stanford University found that proxy advisory firms have a substantial impact on the design of executive compensation programs. 

The Conference Board study concludes that firms do in fact react to the say on pay methodologies and recommendations of ISS and Glass-Lewis by determining in advance whether their executive compensation programs are likely to receive a favorable recommendation, and altering the programs in anticipation of a negative recommendation from these firms. 

The data supporting the study does not speak to whether the changes firms make to their compensation programs in reaction to ISS and Glass-Lewis recommendations are positive or negative for shareholders. The authors conclude that, until proxy advisory firm methodologies are vetted by third-party examiners, it cannot be determined whether these changes are beneficial to companies and their shareholders.

Both reports add valuable data and insights on shareholder voting and the related policy debate.


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