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Manhattan Institute

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Proxy Advisory Firms: Empirical Evidence and the Case for Reform

report

Proxy Advisory Firms: Empirical Evidence and the Case for Reform

May 21, 2018
Legal ReformCorporate Governance
EconomicsFinance

Abstract

Shareholder voting is dominated by institutional investors. The SEC requires institutional investors to vote on corporate proxy matters but allows them to discharge this duty by relying on the voting guidelines of third-party proxy advisory firms. Proxy advisory companies have come under increasing scrutiny and criticism in recent years. This report seeks to inform current reform efforts with a review of the best empirical evidence on these firms.

Key Findings

  • Proxy advisory firms lack transparency. The leading proxy advisors do not publicly disclose how they develop their voting guidelines or the results of any testing to demonstrate that their recommendations are accurate.
  • Institutional investors are influenced by the recommendations of proxy advisory firms. Their influence is most significant in proxy contests, the approval of company-wide equity compensation plans, and executive compensation advisory (“say on pay”) voting.
  • Corporations are influenced by the recommendations of proxy advisory firms. Research generally shows that proxy advisory firms’ influence on the design of company-wide equity compensation plans and say-on-pay voting is harmful to shareholders, but their recommendations for deciding proxy contests (contested director elections involving control of the corporation) are beneficial to shareholders.
  • Proxy advisory firm recommendations may not be in the best interest of shareholders. Proxy advisory firms have no clear fiduciary duty to act in the best interest of the shareholders of institutional investors and may be subject to conflicts of interest.
  • Reform might be necessary. One avenue is by adopting standards to improve proxy advisory firms’ accuracy, transparency, and accountability. Another is to eliminate the requirement that institutional investors vote all items on corporate proxy statements.

READ FULL REPORT

______________________

James R. Copland is a senior fellow and director of legal policy at the Manhattan Institute.

David F. Larcker is a professor and director of the Corporate Governance Research Initiative at the Stanford Graduate School of Business.

Brian Tayan is a researcher with the Corporate Governance Research Initiative at the Stanford Graduate School of Business.

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