The Power of Proxy Advisors: Myth or Reality?
Stephen J. Choi
New York University School of Law
Jill E. Fisch
University of Pennsylvania Law School - Institute for Law and Economics
New York University School of Law; European Corporate Governance Institute
Emory Law Journal, Vol. 59, p. 869, 2010
University of Penn, Institute for Law & Economics Research Paper No. 10-24
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.
Number of Pages in PDF File: 51
Keywords: Corporations, securities regulation, proxy votes by shareholders, empirical findings, influence on proxy voting
JEL Classification: G39, K22
Date posted: October 20, 2010