Are Voting Guidelines Ruling Your Business?

Ormazabal cautions against overreliance on proxy advisors

06/08/2014 Barcelona

Asesorías de voto

Ever since the New York Stock Exchange and the NASDAQ altered their listing conditions in 2003, shareholders have seen their influence on the governance of U.S. listed companies increase. Many institutional investors are now obliged to vote on a much larger range of proxy issues than was necessary before, which often poses challenges in terms of available time and resources to research the issues adequately.

To combat this problem, independent third parties, or proxy advisors, are increasingly being used to advise shareholders on how to fulfill their proxy voting obligations.

IESE’s Gaizka Ormazabal and Alan L. McCall from Stanford’s Graduate School of Business urge caution in following this trend, in a study that examined the effects of proxy advising on 264 stock option repricings for 251 individual firms.

The results suggest that using proxy advisors to make decisions specific to a particular company may not always yield the best results for that company.

Their article, Are Voting Guidelines Ruling Your Business, published in the latest issue of IESE Insight magazine, reveals that "firms with repricing programs more aligned with proxy advisors’ policies had a smaller increase in stock price, weaker operational performance and a higher likelihood of executive and employee turnover."

Proceed with caution

Although the authors are quick to point out that their results are not conclusive, they highlight some legitimate concerns with the use of proxy advisors in making company decisions:

  • proxy advisors lack a direct stake in the corporate performance of the company they advise;
  • because they are deemed independent, advisors are protected under the current regulatory framework;
  • the industry is concentrated in the hands of only two main players, resulting in a lack of competition and in potential conflicts of interest, as the same company may provide services to both investors and corporate issuers on the same governance considerations.

Ormazabal and McCall call for a deeper understanding of how proxy advisor recommendations impact shareholder value and the economy, emphasizing that it is especially important to resolve these ambiguities before such measures are exported beyond U.S. borders.

Accepting that there is "a clear case to be made for a certain amount of shareholder supervision of boards and management," they nonetheless assert that this control should be exercised "with both caution and moderation."

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