Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Sunday, July 22, 2012

Larcker et al. on Economic Consequences of Proxy Advisor's Say on Pay Policies

The Economic Consequences of Proxy Advisor Say-on-Pay Voting Policies, by David F. Larcker, Stanford University - Graduate School of Business; Allan L. McCall, Stanford University - Graduate School of Business; and Gaizka Ormazabal, IESE Business School of the University of Navarra, was recently posted on SSRN.  Here is the 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.

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