Download this Paper Open PDF in Browser

The Power of Proxy Advisors: Myth or Reality?

51 Pages Posted: 20 Oct 2010  

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

Abstract

Recent regulatory changes increasing shareholder voting authority have focused attention on the role of proxy advisors. In particular, greater shareholder empowerment raises the question of how much proxy advisors influence voting outcomes. This Article analyzes the significance of voting recommendations issued by four proxy advisory firms in connection with uncontested director elections. We find, consistent with press reports, that Institutional Shareholder Services (ISS) is the most powerful proxy advisor and that, of the others, only Glass, Lewis & Co. seems to have a meaningful impact on shareholder voting.

This Article also attempts to measure the impact of voting recommendations on voting outcomes. Unlike prior literature, it distinguishes correlation from causality by examining both the recommendation itself and the underlying factors that may influence a shareholder’s vote. Using several different tests, we conclude that popular accounts substantially overstate the influence of ISS. Our findings reveal that the impact of an ISS recommendation is reduced greatly once company- and firm-specific factors important to investors are taken into consideration. Overall, we estimate that an ISS recommendation shifts 6%–10% of shareholder votes. We also determine that a major component of ISS’s influence stems from its role as an information agent, aggregating factors that its subscribers consider important.

Keywords: Corporations, securities regulation, proxy votes by shareholders, empirical findings, influence on proxy voting

JEL Classification: G39, K22

Suggested Citation

Choi, Stephen J. and Fisch, Jill E. and Kahan, Marcel, The Power of Proxy Advisors: Myth or Reality?. Emory Law Journal, Vol. 59, p. 869, 2010; University of Penn, Institute for Law & Economics Research Paper No. 10-24. Available at SSRN: https://ssrn.com/abstract=1694535

Stephen Choi

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States

Jill 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

Paper statistics

Downloads
1,086
Rank
15,738
Abstract Views
5,485