Do Institutional Investors Follow Proxy Advice Blindly?

Abstract

The effectiveness of shareholder voting as a governance mechanism depends in large part on the voting behavior of institutional investors, many of whom receive recommendations on how to vote from proxy advisors such as ISS. Company managers and policymakers are increasingly concerned that institutional investors follow such voting recommendations blindly, without verifying their accuracy. We hypothesize that institutional investors allocate the limited resources available for verifying the accuracy of voting recommendations to voting decisions that are likely to have the greatest impact on portfolio performance. To test this hypothesis, we analyze proprietary data from four large funds, using the funds’ marginal propensity to deviate from voting recommendations as a proxy for resources devoted to verifying their accuracy. Consistent with our hypothesis, we find that funds tend to deviate from voting recommendations more often when they hold a large stake in the portfolio firm, when the firm performs relatively poorly and when the proposal has potentially significant value implications.

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

JEL Classification: D70, G23, G28, G34, G38, K22