How Proxy Advisers Get Companies Talking to Shareholders

Proxy advisers often face criticism for failing to change the sometimes secretive ways of corporate boards during high-stakes proxy voting over executive pay and other governance issues.

But recent research finds that boards substantially increase their engagement with shareholders after , the largest private proxy adviser to investors in the US, gets involved. And that newfound engagement lasts long after a specific proxy-voting controversy.

“There definitely is more corporate board communication, more transparency with investors because of proxy adviser involvement,” says Harvard Business School Professor Aiyesha Dey, the report’s lead author. “The findings show that ISS is a market intermediary that helps firms to talk more with their shareholders—and that’s positive for investors.”

Proxy voting is underway at many companies amid a turbulent economy. Investors have been seeking more communication from companies and boards, prompting many to hire proxy advisers. However, critics of proxy advisers have questioned whether the dominant players, ISS and Glass, Lewis & Co., are too influential.

Though the paper, “Proxy Advisory Firms and Corporate Shareholder Engagement,” focused on the role of ISS in “say-on-pay” proxy voting, Dey says the data suggests that proxy advisers in general can help improve communication between boards and shareholders.

Dey collaborated on the research with Austin Starkweather, assistant professor at the University of Tennessee’s Haslam College of Business, and Joshua T. White, assistant professor at Vanderbilt University’s Owen Graduate School of Management.

Critics of proxy advisers

Proxy advisers are independent firms that provide research to investors. Once a year, between roughly April and June, public companies offer shareholders an opportunity to vote on key issues.

Instead of providing investors with bold guidance on proxy-voting matters, critics say, private proxy advisers tend to dispense biased advice and generic policies that maintain the status quo and approve standard executive pay plans. The largest of these firms, ISS, has been particularly scrutinized by regulators and legislators.

“There's so much criticism about how ISS is not adding value, not making a difference,” Dey explains.

Measuring shareholder engagement on pay

Dey and her coauthors designed a study to investigate how ISS influences shareholder engagement after being hired to provide research and advice on employee compensation proxy votes.

For their study, the authors compiled and analyzed more than 20,000 say-on-pay votes involving more than 4,000 firms in ISS’s database from 2011 to 2019. In these situations, a company’s shareholders can weigh in on executives’ compensation packages and other compensation issues with their votes.

When firms receive a low response to a say-on-pay vote, ISS advises managers to meet with shareholders. If leadership doesn’t put forth a “robust engagement response,” ISS may recommend that shareholders reject the package. ISS considers less than 70 percent support for a pay measure the threshold to mandate conversations.

Based on extensive reviews of corporate documents related to pay and other governance issues, the authors found that the “ISS treatment” significantly increased shareholder engagement in the year after a low say-on-pay vote.

By one measure, ISS-treated corporations were 31 percent more likely to disclose how they engage with shareholders versus other firms. For example, some firms reach out and speak with only investors who own a larger number of shares, the study finds.