Fabrizio Ferri

Shareholder Votes and Proxy Advisors: Evidence from Say on Pay: SHAREHOLDER VOTES AND PROXY ADVISORS

We study the role of proxy advisors (ISS and Glass Lewis & Co.) in the context of mandatory “say on pay” votes, a novel and complex item requiring significant firm-specific analysis. After describing the analysis underlying each proxy advisor’s recommendations, we examine the effect of these recommendations on shareholder votes, stock prices and firms’ behavior. As in prior studies, negative recommendations have a strong association with voting outcomes, but the effect varies with the reasons behind the recommendation. We document a small but significantly negative market reaction to the release of negative recommendations. More than one third of the firms receiving a negative recommendation publicly question the proxy advisors’ methodologies, but this protest has no effect on the recommendation and the voting outcome. The few firms that change their compensation practices obtain a revision in the recommendation and avoid voting dissent. We also present novel evidence on the (substantial) influence of management recommendations on shareholder votes in the context of the “say when on pay” vote, i.e. the vote on whether to hold say on pay votes every one, two or three years. Our findings contribute to the literature on shareholder voting and the related policy debate. JEL Classification: G34, G38, J33, M12

Management Influence on Investors: Evidence from Shareholder Votes on the Frequency of Say on Pay

The literature on shareholder voting has mostly focused on the influence of proxy advisors on shareholder votes. We exploit a unique empirical setting enabling us to provide a direct estimate of management’s influence. Analyzing shareholder votes on the frequency of future say on pay votes, we find that a management recommendation for a particular frequency is associated with a 26% increase in voting support for that frequency. Additional tests suggest that the documented association is likely to capture a causal effect. Management influence varies across firms and is smaller at firms where perceived management credibility is lower. Compared to firms adopting an annual frequency, firms following management’s recommendation to adopt a triennial frequency are significantly less likely to change their compensation practices in response to an adverse say on pay vote, consistent with the notion that a less frequent vote results in lower management accountability.

Market Valuation of Anticipated Governance Changes: Evidence from Contentious Shareholder Meetings

We define annual shareholder meetings as contentious if one or more ballot items are likely to obtain sufficient shareholder votes to induce a firm to implement governance changes. Using a sample of almost 28,000 meetings between 2003 and 2012, we find that abnormal stock returns over the 40-day period prior to contentious meetings are significantly positive and higher than prior to non-contentious meetings. These higher abnormal returns persist after controlling for firm-specific news and proxies for risk factors and are more pronounced in firms with poor past performance. Our results are consistent with investors viewing an increase in the probability of shareholder vote-induced governance changes as value creating, on average.

Executive Compensation, Corporate Governance, and Say on Pay

This monograph explores the relation between corporate governance and executive compensation and evaluates the conditions under which shareholders can bene.t from the right to interfere with the pay setting process by voting on the compensation proposed by the board of directors (Say on Pay). The first part of the monograph lays out the theoretical framework. The second part provides an overview of the origins and country-specific differences in Say on Pay regulation and a detailed summary and evaluation of the empirical literature on the subject.