Outsourcing Shareholder Voting to Proxy Advisory Firms

51 Pages Posted: 19 Jul 2012 Last revised: 2 Sep 2015

See all articles by David F. Larcker

David F. Larcker

Stanford University - Graduate School of Business; European Corporate Governance Institute (ECGI); Stanford University - Arthur & Toni Rembe Rock Center for Corporate Governance

Allan L. McCall

Stanford University - Graduate School of Business

Gaizka Ormazabal

University of Navarra, IESE Business School; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Date Written: October 30, 2014

Abstract

This paper examines the economic consequences of institutional investors outsourcing research and voting decisions in public company elections to proxy advisory firms. We investigate the implications of these decisions in the context of shareholder say-on-pay voting required in 2011 under the Dodd-Frank Act. We find three primary results: proxy advisory firm recommendations have a substantive impact on say-on-pay voting outcomes; a substantial 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; and 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.

Note: 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."

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

JEL Classification: G1; G3; K2; L5

Suggested Citation

Larcker, David F. and McCall, Allan L. and Ormazabal, Gaizka, Outsourcing Shareholder Voting to Proxy Advisory Firms (October 30, 2014). Journal of Law and Economics, Vol. 58, No. 1 (February 2015), pp. 173-204, Rock Center for Corporate Governance at Stanford University Working Paper No. 119, Stanford University Graduate School of Business Research Paper No. 14-27 (2105R), IESE Business School Working Paper No. WP1096-E, Available at SSRN: https://ssrn.com/abstract=2101453 or http://dx.doi.org/10.2139/ssrn.2101453

David F. Larcker (Contact Author)

Stanford University - Graduate School of Business ( email )

Graduate School of Business
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European Corporate Governance Institute (ECGI) ( email )

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Stanford University - Arthur & Toni Rembe Rock Center for Corporate Governance ( email )

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Stanford, CA 94305-8610
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Allan L. McCall

Stanford University - Graduate School of Business ( email )

Stanford, CA 94305
United States

Gaizka Ormazabal

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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