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Director Elections and the Role of Proxy Advisors


Stephen J. Choi


New York University School of Law

Jill E. Fisch


Institute for Law and Economics, University of Pennsylvania Law School

Marcel Kahan


New York University School of Law; European Corporate Governance Institute


Southern California Law Review, Vol. 82, Pg. 649, 2009
U of Penn, Inst for Law & Econ Research Paper No. 08-18

Abstract:     
Using a dataset of proxy recommendations and voting results for uncontested director elections from 2005 and 2006 at S&P 1500 companies, we examine how advisors make their recommendations. Of the four firms we study, Institutional Shareholder Services (ISS), Proxy Governance (PGI), Glass Lewis (GL), and Egan Jones (EJ), ISS has the largest market share and is widely regarded as the most influential. We find that the four proxy advisory firms differ substantially from each other both in their willingness to issue a withhold recommendation and in the factors that affect their recommendation.

It is not clear that these differences, or the bases for the recommendations, are transparent to the institutions that purchase proxy advisory services. If the differences are not apparent, investors may not accurately perceive the information content associated with a withhold recommendation, and investors may rely on those recommendations based on an erroneous understanding of the basis for that recommendation. To the extent that proxy advisors aggregate information for the purpose of facilitating an informed shareholder vote, these limitations may impair the effectiveness of the shareholder franchise. If the differences are apparent, our results show that investors, though selecting a proxy advisor, can indirectly choose the bases for their vote on directors. To that extent, it is likely that proxy advisory firms will retain more investor clients if their recommendations are based on factors that their clients consider relevant.

Number of Pages in PDF File: 54

Keywords: corporations, securities law, shareholder voting, proxy recommendations, proxy advisory services, election of directors, regression analysis

JEL Classification: G34, K22

working papers series


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Date posted: August 16, 2008 ; Last revised: June 11, 2010

Suggested Citation

Choi, Stephen J. and Fisch, Jill E. and Kahan, Marcel, Director Elections and the Role of Proxy Advisors. Southern California Law Review, Vol. 82, Pg. 649, 2009; U of Penn, Inst for Law & Econ Research Paper No. 08-18. Available at SSRN: http://ssrn.com/abstract=1225963 or http://dx.doi.org/10.2139/ssrn.1225963

Contact Information

Stephen J. Choi
New York University School of Law ( email )
40 Washington Square South
New York, NY 10012-1099
United States
Jill E. Fisch (Contact Author)
Institute for Law and Economics, University of Pennsylvania Law School ( email )
3501 Sansom Street
Philadelphia, PA 19104
United States
215-746-3454 (Phone)
215-573-2025 (Fax)
Marcel Kahan
New York University School of Law ( email )
40 Washington Square South
New York, NY 10012-1099
United States
212-998-6268 (Phone)
212-995-4341 (Fax)
European Corporate Governance Institute ( email )
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
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