Proxy Advice and Errors in Shareholder Voting

Abstract

How does proxy advice relate to voting mistakes?  Structural estimates of latent proposal quality imply advisor ISS’s recommendations are wrong half the time for shareholder proposals.  Vote outcomes, however, are correct the vast majority of the time because positive recommendations, which are particularly uninformative, are less influential.  Our results support recent theory that proxy advice crowds out information collection by institutional investors and aims to create controversy.  Recommendations are less informative than most mutual funds' votes.  Vanguard’s votes are a considerably better benchmark for proposal quality than ISS recommendations. Overall, our analysis implies limiting ISS’s influence would improve voting outcomes.

Keywords: shareholder voting, shareholder proposals, proxy advice, informed voting

JEL Classification: G30