Proxy Advisory Firms

Proxy advisory firms are hired by institutional investors to research and recommend voting strategies at publicly listed companies. Two proxy advisory firms, Institutional Shareholder Services and Glass Lewis, control the vast majority of the US proxy advisory market.

The firms pull public filings from the Securities and Exchange Commission (SEC) most specifically a company’s annual proxy statement and its 10-K annual report, and apply proprietary policies and evaluation methods to formulate their vote recommendations.

Institutional investor clients receive a multi-page report on each company with vote recommendations and rationale for all ballot items including director elections, say-on-pay, equity plan approval, and any shareholder proposals.

Proxy Advisors and Executive Compensation

For executive compensation specifically, proxy advisors evaluate CEO pay as compared to shareholder returns (both relative to a peer group and absolute returns) over specific time periods to formulate a vote recommendation for say-on-pay proposals.

Proxy advisory firm vote recommendations have a significant impact on shareholder vote results. If the Institutional Shareholder Services (ISS) proposes that shareholders vote against a say-on-pay proposal, support can decline 25-30%. Unfortunately, the proxy advisory firms provide little opportunity for companies to address material errors in their reports, or to respond to mischaracterizations.

For US companies, say-on-pay votes are advisory. However, reduced shareholder support (below 70%) or failure to achieve majority support has notable impacts. Companies with failed say-on-pay votes tend to under-perform peers and directors may see increased votes against them in future elections. Low support or a failed proposal will most likely initiate an extensive shareholder engagement process. The lack of disclosure of a process may drive proxy advisory firms to recommend future say-on-pay votes and against directors serving on the Compensation Committee.

Regulation of Proxy Advice

By and large, proxy advisors have avoided meaningful regulation regarding their recommendations. However, the SEC recently finalized new rules regarding their services which were scheduled to become effective in 2022, current SEC Chairman Gary Gensler has announced a temporary pause in the implementation to review the 2020 rule. The Center will continue to closely monitor any developments and keep Subscribers up-to-date.

Please find below a range of resources providing insight to proxy advisory firms’ voting policies, pay-for-performance evaluations, and strategies for addressing an adverse vote recommendations



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