The Economic Consequences of Proxy Advisor Say-on-Pay Voting Policies

David F. Larcker, Allan L. McCall and Gaizka Ormazabal
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David F. Larcker: Rock Center for Corporate Governance, Stanford University
Allan L. McCall: Stanford University
Gaizka Ormazabal: University of Navarra

Research Papers from Stanford University, Graduate School of Business

Abstract: This paper examines changes in executive compensation programs made by firms in response to proxy advisory firm say-on-pay voting policies. Using proprietary models, proxy advisory firms, primarily Institutional Shareholder Services and Glass, Lewis & Co., provide institutional shareholders with a "for" (positive) or "against" (negative) recommendation on the required management say-on-pay proposal in the annual proxy statement. Analyzing a large sample of firms from the Russell 3000 that are subject to the initial say-on-pay vote mandated by the Dodd-Frank Act, we find three important results. First, proxy advisory firm recommendations have a substantive impact on say-on-pay voting outcomes. Second, a significant number of firms change their compensation programs in the time period before the formal shareholder vote in a manner consistent with the features known to be favored by proxy advisory firms apparently in an effort to avoid a negative recommendation. Third, the stock market reaction to these compensation program changes is statistically negative. Thus, the proprietary models used by proxy advisory firms for say-on-pay recommendations appear to induce boards of directors to make choices that decrease shareholder value.

JEL-codes: G10 G30 K20 L50 (search for similar items in EconPapers)
Date: 2012-07
New Economics Papers: this item is included in nep-cdm
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Citations: View citations in EconPapers (1)

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