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.