More and more, shareholder advisory firms are directly influencing how shareholders vote on matters such as executive pay and elections of corporate directors. The growing influence of these proxy advisors can be seen as both good and bad, according to a high-level presentation this past Friday by the Carroll School of Management’s Nadya Malenko.
The associate professor of finance was one of several featured speakers at a conference sponsored by the U.S. Securities and Exchange Commission and New York University. The gathering in New York brought together 150 practitioners, regulators, academics, shareholders, and others.
One of Malenko’s key findings has to do with so-called “Say on Pay” votes taken by shareholders on executive compensation. She has studied recommendations issued by the leading proxy advisory firm, Institutional Shareholder Services, or ISS.
When ISS favors a compensation package, so do 93 percent of the voting shareholders, and when the firm is against such a package, shareholder support for the management measure drops significantly to 69 percent, according to Malenko. (Shareholders tend to vote with management on various issues, though less so than in the past, due partly to the influence of proxy advisors.)
Malenko alluded to debate recently over the actual influence of advisory firms, which have arisen mainly in the past couple of decades. Are the firms truly causing shareholders to vote the way they do? Or do the shareholders just happen to take those positions based largely on their own research and inclinations? Using an advanced statistical technique called “regression discontinuity analysis,” Malenko reported that approximately 25 percent of the “Say on Pay” votes are attributable to recommendations by proxy advisors.
That percentage is “the true causal effect and not purely correlation” with advisory recommendations, Malenko explained in her January 19 presentation. “ISS moves about a quarter of the votes. That’s quite large.” The impact is even stronger when it comes to votes cast by smaller institutional investors that don’t have large research operations of their own. Among these investors would be some mutual funds, pension funds, insurance companies, and endowments.
She presented other data indicating that large majorities of institutional investors believe that advice from the proxy advisory firms “allows us to make more informed voting decisions.” That’s the good part, Malenko said.
But the Carroll School professor also pointed to some worries. These include potential conflicts of interest (proxy advisors also often provide consulting services to the same corporations whose proposals they evaluate) as well as the possibility that the proxy research might be “crowding out” or discouraging independent research by the smaller institutional investors.
“We know that proxy advisors are influential. They affect voting outcomes and corporate policies,” Malenko said, noting that companies often make policy changes both before and after shareholder votes. “There are reasons to believe that this new development is good for shareholder value, but there are also important reasons for concern, and any regulation should take these concerns into account.”
The gathering in New York was part of a series called the “SEC-NYU Dialogue on Securities Markets Regulation,” which aims in part to “promote reforms to the regulatory framework governing the US securities market,” according to NYU’s Salomon Center for the Study of Financial Institutions. This particular gathering addressed the topic of shareholder engagement with publicly traded companies. In addition to the 150 attendees, many others joined an online webcast.
Malenko’s presentation drew in part from a paper she coauthored with Yao Shen, Ph.D. ’16, who received her doctorate from the Carroll School and is now an assistant professor of finance at Baruch College, City University of New York. Titled “The Role of Proxy Advisory Firms: Evidence from a Regression-Discontinuity Design,” the article was published in 2016 by the Review of Financial Studies, one of the top journals in the field.
—Carroll School Communications