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Outsourcing Shareholder Voting to Proxy Advisory Firms


David F. Larcker


Stanford University - Graduate School of Business

Allan L. McCall


Stanford University - Graduate School of Business

Gaizka Ormazabal


University of Navarra, IESE Business School

June 13, 2014

Rock Center for Corporate Governance at Stanford University Working Paper No. 119
Stanford University Graduate School of Business Research Paper No. 14-27

Abstract:     
This paper examines the economic consequences of institutional investors outsourcing research and voting decisions on matters submitted to a vote of public company shareholders to proxy advisory firms. These outsourcing decisions appear to be the result of the regulatory requirement that institutional investors vote their shares combined with incentives for these investors to minimize their cost of voting activity. We investigate the implications of these decisions in the context of shareholder say-on-pay voting required in 2011 under the Dodd-Frank Act. Analyzing a large sample of firms from the Russell 3000 that are subject to the initial say-on-pay vote mandated by the Dodd-Frank Act, we find three primary results. First, consistent with prior research, proxy advisory firm recommendations have a substantive impact on say-on-pay voting outcomes. Second, a significant number of firms change their compensation programs in the time period before the formal shareholder vote in a manner consistent with the features known to be favored by proxy advisory firms in an effort to avoid a negative voting recommendation. Third, the stock market reaction to these compensation program changes is statistically negative. These results suggest that the outsourcing of voting to proxy advisory firms appears to have the unintended economic consequence that boards of directors are induced to make choices that decrease shareholder value. While this evidence does not speak to the optimality of outsourcing all voting decisions compared to alternative regulatory constructs (e.g. prohibiting proxy advisors or reducing the number of items to be voted on), it does inform this debate by providing evidence on the potential negative economic consequences of outsourcing shareholder voting to proxy advisors.

Note: This paper has been retitled from "The Economic Consequences of Proxy Advisor Say-on-Pay Voting Policies" to "Outsourcing Shareholder Voting to Proxy Advisory Firms."

Number of Pages in PDF File: 59

Keywords: proxy advisory firms, say-on-pay, institutional shareholder voting

JEL Classification: G1, G3, K2, L5, G34, G38, J33, M52

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Date posted: July 19, 2012 ; Last revised: July 29, 2014

Suggested Citation

Larcker, David F. and McCall, Allan L. and Ormazabal, Gaizka, Outsourcing Shareholder Voting to Proxy Advisory Firms (June 13, 2014). Rock Center for Corporate Governance at Stanford University Working Paper No. 119; Stanford University Graduate School of Business Research Paper No. 14-27. Available at SSRN: http://ssrn.com/abstract=2101453 or http://dx.doi.org/10.2139/ssrn.2101453

Contact Information

David F. Larcker (Contact Author)
Stanford University - Graduate School of Business ( email )
Graduate School of Business
518 Memorial Way
Stanford, CA 94305-5015
United States
650-725-6159 (Phone)

Allan L. McCall
Stanford University - Graduate School of Business ( email )
Stanford, CA 94305
United States
Gaizka Ormazabal
University of Navarra, IESE Business School ( email )
Avenida Pearson 21
Barcelona, 08034
Spain
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