Many institutional investors rely on a proxy advisory firm to assist them in voting the company proxy and fulfilling their fiduciary responsibility to vote in the interest of beneficial shareholders. The largest and most influential proxy advisory firm is Institutional Shareholder Services (ISS). The recommendations of ISS are not inconsequential. Academic and professional research suggests that a recommendation by ISS can change the outcome of a vote by 15 to 20 percent, depending on the matter of the proposal.
At the same time, according to Stanford’s David Larcker, there is little evidence that proxy advisory recommendations are correct or that they improve corporate outcomes. In fact recent research suggests that they might actually decrease shareholder value.
Professor Larcker examines these issues as they relate to ISS guidelines for exchange offers and option repricings:
- Do proxy advisors have appropriate incentive to verify that their recommendations are correct?
- Should board members require evidence that ISS guidelines are value increasing before they adjust their policies to gain a favorable recommendation?
- Proxy advisory firms enjoy significant barriers to entry and little competition. Is this desirable for shareholders?