Director Elections and the Influence of Proxy Advisors

77 Pages Posted: 2 May 2008 Last revised: 7 May 2008

Stephen J. Choi

New York University School of Law

Jill E. Fisch

University of Pennsylvania Law School - Institute for Law and Economics

Marcel Kahan

New York University School of Law; European Corporate Governance Institute

Date Written: May 2008

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 and how these recommendations and other factors affect the shareholder vote. Of the four firms we study, Institutional Shareholder Services (ISS), Proxy Governance, Glass Lewis, and Egan Jones, ISS is widely regarded as the most influential and its recommendation is claimed to sway 20-30% of the vote. We find that the four proxy advisory firms differ systematically from each other both in their willingness to issue a withhold recommendation and in the factors that affect their recommendation.

We further find that all the proxy advisors, but particularly ISS, base their recommendations largely on factors that shareholders take into account (independent of the recommendation) in casting their vote. Once these factors are controlled for, overall voting outcomes are substantially similar whether or not a proxy advisor has issued a recommendation. Our analysis demonstrates that the reported influence of ISS is substantially overstated. Our evidence is consistent with the view that proxy advisors act primarily as agents or intermediaries which aggregate information that investors find important in determining how to vote in director elections rather than as independent power centers.

Keywords: proxy advisors, corporate governance, shareholder voting, ISS, institutional investors

Suggested Citation

Choi, Stephen J. and Fisch, Jill E. and Kahan, Marcel, Director Elections and the Influence of Proxy Advisors (May 2008). NYU Law and Economics Research Paper No. 08-22; 3rd Annual Conference on Empirical Legal Studies Papers; Fordham Law Legal Studies Research Paper No. 1127282. Available at SSRN: https://ssrn.com/abstract=1127282 or http://dx.doi.org/10.2139/ssrn.1127282

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)

University of Pennsylvania Law School - Institute for Law and Economics ( 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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