And Then a Miracle Happens!: How Do Proxy Advisory Firms Develop Their Voting Recommendations?

8 Pages Posted: 26 Feb 2013 Last revised: 28 Oct 2013

See all articles by David F. Larcker

David F. Larcker

Stanford University - Graduate School of Business

Allan L. McCall

Stanford University - Graduate School of Business

Brian Tayan

Stanford University - Graduate School of Business

Date Written: February 25, 2013

Abstract

Proxy advisory firms are independent, for-profit consulting companies that provide voting recommendations to individual and institutional investors. Research shows that these firms have significant influence on voting outcomes. Given this influence, it is important that investors ensure that the policies of these firms are “accurate” — i.e., that they successfully and reliably differentiate between good and bad future outcomes.

In this Closer Look, we carefully examine the process by which proxy advisory firms formulate their voting policies. In doing so, we identify serious issues that raise questions about the accuracy of their recommendations.

We ask: How exactly do proxy advisory firms determine that a policy is “correct”? Who participates in the policy development process with these firms? How do we know that their opinions are representative of shareholder broadly? Why don’t proxy advisory firms disclose the research that supports each of their voting recommendations?

Topics, Issues and Controversies in Corporate Governance and Leadership: The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the book Corporate Governance Matters, and A Real Look at Real World Corporate Governance.

Keywords: corporate governance, proxy advisors, proxy voting, proxy advisory services

JEL Classification: G3, G30, G34, J33, M4, M14, M52

Suggested Citation

Larcker, David F. and McCall, Allan L. and Tayan, Brian, And Then a Miracle Happens!: How Do Proxy Advisory Firms Develop Their Voting Recommendations? (February 25, 2013). Rock Center for Corporate Governance at Stanford University Closer Look Series: Topics, Issues and Controversies in Corporate Governance and Leadership No. CGRP- 31. Available at SSRN: https://ssrn.com/abstract=2224329

David F. Larcker (Contact Author)

Stanford University - Graduate School of Business ( email )

Graduate School of Business
518 Memorial Way
Stanford, CA 94305-5015
United States
650-725-6159 (Phone)

Allan L. McCall

Stanford University - Graduate School of Business ( email )

Stanford, CA 94305
United States

Brian Tayan

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

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