Investigating the Impact of Proxy Advisor Conflicts Of Interest on Shareholder Value

This paper examines the economic consequences of proxy voting results perceived by some investors to have been influenced by conflicts of interest. The proxy advisory industry operates as a duopoly, with Institutional Shareholder Services (ISS) and Glass Lewis estimated to hold a combined market share of 97%. These firms primarily sell voting recommendations on proxy proposals to institutional investors. However, ISS has a subsidiary, ISS Corporate Solutions, that sells consulting services to corporations seeking assistance with proposals to be presented to shareholders. Glass Lewis does not have a similar business. This paper examines the stock market reaction to voting outcomes in favor of management where ISS fully supported management and Glass Lewis did not. This paper finds that the excess return on the meeting date for this voting outcome is statistically negative, decreasing shareholder value, on average, by 0.15% (t-stat= -1.914). This significant negative excess returns is observed only on the meeting date; no estimate of excess returns within a trading week (-4 trading days, +4 trading days) of the meeting were statistically different from zero. Further, an ANOVA indicated none of the 7 other voting outcomes exhibited significant excess returns. A regression analysis comparing this “Conflict” scenario with a clustered group of all other voting outcomes shows a negative effect that is not statistically significant

Quieting the Sharholders\u27 Voice: Empirical Evidence of Pervasive Bundling in Proxy Solicitations

The integrity of shareholder voting is critical to the legitimacy of corporate law. One threat to this process is proxy “bundling,” or the joinder of more than one separate item into a single proxy proposal. Bundling deprives shareholders of the right to convey their views on each separate matter being put to a vote and forces them to either reject the entire proposal or approve items they might not otherwise want implemented. In this Paper, we provide the first comprehensive evaluation of the anti-bundling rules adopted by the Securities and Exchange Commission (“SEC”) in 1992. While we find that the courts have carefully developed a framework for the proper scope and application of the rules, the SEC and proxy advisory firms have been less vigilant in defending this instrumental shareholder right. In particular, we note that the most recent SEC interpretive guidance has undercut the effectiveness of the existing rules, and that, surprisingly, proxy advisory firms do not have well-defined heuristics to discourage bundling. Building on the theoretical framework, this Article provides the first large-scale empirical study of bundling of management proposals. We develop four possible definitions of impermissible bundling and, utilizing a data set of over 1,300 management proposals, show that the frequency of bundling in our sample ranges from 6.2 percent to 28.8 percent (depending on which of the four bundling definitions is used). It is apparent that bundling occurs far more frequently than indicated by prior studies. We further examine our data to report the items that are most frequently bundled and to analyze the proxy advisors’ recommendations and the voting patterns associated with bundled proposals. This Article concludes with important implications for the SEC, proxy advisors, and institutional investors as to how each party can more effectively deter impermissible bundling and thus better protect the shareholder franchise

Behind the Curtain

[Excerpt] On August 31, 2004, for the first time, the nation’s mutual fund companies reported how they cast their proxy votes at the public companies in which they invest. The disclosure is the result of Securities and Exchange Commission rules adopted in January 2003, rules that the AFL-CIO first petitioned for in December 2000 and that the mutual fund industry strenuously opposed. This report evaluates how the 10 largest mutual fund families voted when presented with the opportunity to curb CEO pay abuses at a dozen S&P 500 companies in 2004. We chose executive compensation as our benchmark because, in the words of billionaire investor Warren Buffet, “The acid test for reform will be CEO compensation.

Behind the Curtain: How the 10 Largest Mutual Fund Families Voted When Presented with 12 Opportunities to Curb CEO Pay Abuse in 2004

[Excerpt] On August 31, 2004, for the first time, the nation’s mutual fund companies reported how they cast their proxy votes at the public companies in which they invest. The disclosure is the result of Securities and Exchange Commission rules adopted in January 2003, rules that the AFL-CIO first petitioned for in December 2000 and that the mutual fund industry strenuously opposed. This report evaluates how the 10 largest mutual fund families voted when presented with the opportunity to curb CEO pay abuses at a dozen S&P 500 companies in 2004. We chose executive compensation as our benchmark because, in the words of billionaire investor Warren Buffet, “The acid test for reform will be CEO compensation.” We found that, when it comes to voting proxies on proposals involving CEO pay abuses, there is significant variation among fund families. The scores in our survey ranged from a high of 100% for American Century to a low of 20% for Putnam

The Oligopolistic Gatekeeper: The U.S. Accounting Profession

The accounting and financial scandals the last few years not only produced the Sarbanes-Oxley Act, but have prompted a good deal of debate what forces led to so many dramatic reporting failures. This article is the only work to examine how the competitive structure of the accounting industry contributed to its movement from being a profession to a business that performed auditing. In the article we find not only documentation that the accounting profession is an oligopoly but a sound explanation of how its poor structure contributes significantly to negative social welfare. Throughout the article provides rich support of data to support explanations of the forces that have impacted the accounting profession as well as financial reporting. Most importantly, the article connects how the accounting profession\u27s poor competitive structure likely contributed to the financial and accounting scandals of 2001 and 2002 by making it possible for the mangers of their audit clients to trade off better audits for consulting services. The article also provides insight into weaknesses that continue even after reforms such as those introduced by Sarbanes-Oxley. Several steps to strengthen the accounting industry so that it can return to being a zealous gatekeeper are also proposed in the article

AFL-CIO Key Votes Survey: How Investment Managers Voted in the 2004 Proxy Season

[Excerpt] Like other investment management decisions, pension funds generally delegate the authority to vote their shares to a money manager or a specialized proxy voting consultant. Because proxies are a plan asset, ensuring that they are voted in the interests of beneficiaries is part of a trustee’s fiduciary duty. The Key Votes Survey is intended to help trustees fulfill this duty by reviewing the voting records of these investment managers and proxy consultants

Stock Options: The Backdating Issue

[Excerpt] Employee stock options are contracts giving employees the right to buy the company’s common stock at a specified exercise price, at a specified time or during a specified period, and after a specified vesting period. The value of the option when granted lies in the prospect that the market price of the company’s stock will increase by the time the option is exercised (used to purchase stock). At the grant date for the options, rather than selecting an exercise price based on the current market price for the stock, officials at some companies have selected a prior date with a lower market price; that is, they backdated stock options to an earlier grant date. If this backdating occurred without public disclosure, the recipient of the stock options received increased compensation in violation of Securities and Exchange Commission (SEC) regulations, generally accepted accounting rules, and tax laws. Some backdating is said to involve “sloppiness,” not fraud. The backdating of stock options has imposed costs on shareholders, employees, bondholders, and taxpayers. A corporate official who has profited from undisclosed backdating of stock options may not be responsible or even knowledgeable of the backdating. “Nonqualified” stock options, which have no special tax criteria to meet, are the focus of the backdating controversy primarily because they can be granted in unlimited amounts. The magnitude of stock option grants grew dramatically in the 1990s, subsequent to passage of the Omnibus Budget Reconciliation Act of 1993, a stock market boom, and revised accounting rules. Recent corporate disclosure changes have reduced the opportunities and rewards for backdating stock options. Empirical studies about backdating have been done by academics and investigative journalists. Four recent regulatory actions may have reduced the backdating of stock options, but problems persist. On December 16, 2004, the Financial Accounting Standards Board issued new rules requiring companies to subtract the expense of options from their earnings. After August 29, 2002, the Sarbanes-Oxley Act required that companies notify the SEC within two business days after granting stock options. In 2003, the SEC required increased disclosure of stock option plans. The SEC issued enhanced option grant disclosure rules effective December 15, 2006. Policy options to further reduce backdating and other timing manipulation include changes in SEC regulations and a change in the tax law. The SEC, various state prosecutorial, and Department of Justice (DOJ) probes into backdating abuses are ongoing. In addition, many firms have mounted their own internal probes into possible abuses. By November 2007, the SEC’s investigation caseload had fallen from a peak of 160 to about 80, and the SEC had brought civil enforcement actions against seven companies and 26 former executives associated with 15 firms. And according to reports from the DOJ, there were at least 10 criminal filings against defendants for backdating. As of January 2, 2008, the only CEO to be convicted of charges related to backdating was Greg Reyes, former Brocade CEO. This report will be updated as issues develop or new legislation is introduced

Wormholes, Gamma Ray Bursts and the Amount of Negative Mass in the Universe

In this essay, we assume that negative mass objects can exist in the extragalactic space and analyze the consequences of their microlensing on light from distant Active Galactic Nuclei. We find that such events have very similar features to some observed Gamma Ray Bursts and use recent satellite data to set an upper bound to the amount of negative mass in the universe.Comment: Essay awarded ``Honorable Mention'' in the Gravity Foundation Research Awards, 199

The Power of Proxy Advisors: Myth or Reality?

Recent regulatory changes increasing shareholder voting authority have focused attention on the role of proxy advisors. In particular, greater shareholder empowerment raises the question of how much proxy advisors influence voting outcomes. This Article analyzes the significance of voting recommendations issued by four proxy advisory firms in connection with uncontested director elections. We find, consistent with press reports, that Institutional Shareholder Services (ISS) is the most powerful proxy advisor and that, of the others, only Glass, Lewis & Co. seems to have a meaningful impact on shareholder voting. This Article also attempts to measure the impact of voting recommendations on voting outcomes. Unlike prior literature, it distinguishes correlation from causality by examining both the recommendation itself and the underlying factors that may influence a shareholder’s vote. Using several different tests, we conclude that popular accounts substantially overstate the influence of ISS. Our findings reveal that the impact of an ISS recommendation is reduced greatly once company- and firm-specific factors important to investors are taken into consideration. Overall, we estimate that an ISS recommendation shifts 6%–10% of shareholder votes. We also determine that a major component of ISS’s influence stems from its role as an information agent, aggregating factors that its subscribers consider important

The Distorted Time in Wonderland and Looking-Glass :Lewis Carroll’s Ideal

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