Outsourcing Shareholder Voting to Proxy Advisory Firms

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.

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: 63

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

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

working papers series