Are ISS Recommendations Informative? Evidence from Assessments of Compensation Practices
51 Pages Posted: 4 Jun 2020 Last revised: 6 Oct 2020
Date Written: October 5, 2020
Using detailed information from the largest proxy advisor in the U.S., Institutional Shareholder Services (ISS), we examine whether proxy advisors’ assessments of firms’ compensation practices are able to identify poor compensation practices as measured by subsequent performance. While prior research provides consistent evidence of an association between shareholder voting outcomes and proxy advisors’ Say-on-Pay recommendations, the evidence is mixed over whether their recommendations are informative about the quality of firms’ compensation practices. We find that ISS “Against” recommendations and negative assessments are associated with worse future accounting performance, consistent with ISS being able to detect low quality compensation packages. However, workload compression has an effect, as we find that the relation between assessments and future performance only occurs during the off season (i.e. for firms with non-December fiscal year ends).
Keywords: Proxy Advisors, CEO Compensation, Say-on-Pay, Institutional Shareholder Voting
JEL Classification: G23, G34, J33, M12
Suggested Citation: Suggested Citation