The Big Thumb on the Scale: An Overview of the Proxy Advisory Industry

12 Pages Posted: 4 Jun 2018

See all articles by James Copland

James Copland

Manhattan Institute

David F. Larcker

Stanford University - Graduate School of Business

Brian Tayan

Stanford University - Graduate School of Business

Date Written: May 31, 2018

Abstract

Proxy advisory firms have significant influence over the voting decisions of institutional investors and the governance choices of publicly traded companies. However, it is not clear that the recommendations of these firms are correct and generally lead to better outcomes for companies and their shareholders. This Closer Look provides a comprehensive review of the proxy advisory industry and the influence of these firms on voting behavior, corporate choices, and outcomes, and it outlines potential reforms for the industry.

We ask:

• How accurate are the voting recommendations of proxy advisory firms? • How influential are they over voting practices and corporate choices? • Should steps be taken to reduce their influence or improve the reliability of their recommendations? • Would greater transparency, back-testing, and regulation improve the market for their services?

Note: The Stanford Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance and executive leadership. 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 books Corporate Governance Matters and A Real Look at Real World Corporate Governance.

Keywords: Corporate governance, Institutional Shareholder Services, ISS, Glass Lewis, institutional investors, shareholder voting, shareholder activism, shareholder pressure, proxy advisory services, proxy firms, proxy voting, governance quality, compensation design, compensation choices, corporate governance

JEL Classification: G28, K22

Suggested Citation

Copland, James and Larcker, David F. and Tayan, Brian, The Big Thumb on the Scale: An Overview of the Proxy Advisory Industry (May 31, 2018). Rock Center for Corporate Governance at Stanford University Closer Look Series: Topics, Issues and Controversies in Corporate Governance No. CGRP-72; Stanford University Graduate School of Business Research Paper No. 18-27. Available at SSRN: https://ssrn.com/abstract=3188174

James Copland

Manhattan Institute ( email )

52 Vanderbilt Avenue
New York, NY 10017
United States

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)

Brian Tayan

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

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