The Economic Consequences of Proxy Advisor Say-on-Pay Voting Policies
AbstractThis paper examines changes in executive compensation programs made by firms in response to proxy advisory firm say-on-pay voting policies. Using proprietary models, proxy advisory firms, primarily Institutional Shareholder Services and Glass, Lewis & Co., provide institutional shareholders with a "for" (positive) or "against" (negative) recommendation on the required management say-on-pay proposal in the annual proxy statement. Analyzing a large sample of firms from the Russell 3000 that are subject to the initial say-on-pay vote mandated by the Dodd-Frank Act, we find three important results. First, proxy advisory firm recommendations have a substantive impact on say-on-pay voting outcomes. Second, a significant number of firms change their compensation programs in the time period before the formal shareholder vote in a manner consistent with the features known to be favored by proxy advisory firms apparently in an effort to avoid a negative recommendation. Third, the stock market reaction to these compensation program changes is statistically negative. Thus, the proprietary models used by proxy advisory firms for say-on-pay recommendations appear to induce boards of directors to make choices that decrease shareholder value.
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Bibliographic InfoPaper provided by Stanford University, Graduate School of Business in its series Research Papers with number 2105.
Date of creation: Jul 2012
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Find related papers by JEL classification:
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
- K20 - Law and Economics - - Regulation and Business Law - - - General
- L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
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