Finance and Investing

How Proxy Advisers Get Companies Talking to Shareholders

An analysis of say-on-pay votes by Aiyesha Dey showed how the "ISS treatment" significantly increased investor engagement.

Low angle view of glass buildings intersecting.

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.”

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.

Key finding: Engagement disclosure grew sixfold

A fraction of companies disclosed some form of shareholder engagement in 2011, but that percent grew to more than one-third by 2019, suggesting that engagement has increased with the rise of proxy advisers.

  • 5.5%
    2011
  • 36%
    2019

“This trend coincides with increasing calls for engagement from proxy advisers, shareholders, and regulators,” the authors write.

Sustaining engagement

Wall Street investors have rewarded the mere possibility of a company getting the “ISS treatment,” driving up share prices by 2 to 3 percent for firms that fall below the 70 percent say-on-pay voting threshold. This suggests that investors anticipate and even welcome the threat of ISS monitoring and accountability, even if it results in sanctions against a company, the authors write.

Another plus: Increased shareholder engagement continues well after the initial ISS scrutiny.

“Once engagement goes up, it’s kind of sustained,” says Dey. “There can be many reasons for this, but it seems that once firms set up the infrastructure to communicate and engage with shareholders, they say to themselves, ‘There’s a positive benefit here. Why not continue?’”

Pay study in future

But does engagement translate into impact on executive pay?

Dey says it’s too early to say. She and her colleagues are currently studying the influence of proxy advisers on corporate compensation. But early evidence suggests, among other things, that proxy-adviser activity helps shift compensation packages from time-based bonuses to performance-based bonuses.

Disclosure: Dey holds no financial stake in ISS or other proxy advisers.

Image by HBSWK with asset from AdobeStock

Have feedback for us?

Proxy Advisory Firms and Corporate Shareholder Engagement

Dey, Aiyesha, Austin Starkweather, and Joshua White. "Proxy Advisory Firms and Corporate Shareholder Engagement." Review of Financial Studies 37, no. 12 (December 2024): 3877–3931.

Latest from HBS faculty experts

Expertly curated insights, precisely tailored to address the challenges you are tackling today.

Strategy and Innovation

Social Responsibility

Diversity and Inclusion