From Volume 82, Number 4 (May 2009)
Using a dataset of proxy recommendations and voting results for uncontested director elections from 2005 and 2006 at Standard & Poor’s 1500 companies, we examine how advisors make their recommendations. Of the four firms we study—Institutional Shareholder Services (“ISS”), PROXY Governance, Inc. (“PG”), Glass, Lewis & Company (“GL”), and Egan-Jones Proxy (“EJ”)—ISS has the largest market share and is widely regarded as the most influential. We find that the four proxy advisory firms differ substantially from each other in their willingness to issue a withhold recommendation, in the factors that affect their recommendations, and in the relative weight of those factors. Specifically, ISS focuses on governance-related factors, PG on compensation-related factors, GL on audit/disclosure-related factors, and EJ on an eclectic mix of factors. To the extent these differences are understood, institutional investors can subscribe to those advisors whose recommendations best conform to the investors’ assessments of value-maximizing corporate governance. But if these differences are not known, then proxy advisors may lack accountability for—and can pursue their own agenda in making—their voting recommendations, thereby impairing the effectiveness of the shareholder franchise.