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“And then a Miracle Happens!: How Do Proxy Advisory Firms Develop Their Voting Recommendations? (PDF)
Authors: David F. Larcker, Allan L.McCall and Brian Tayan, Stanford Graduate School of Business
Date: February 25, 2013
Rock Center for Corporate Governance at Stanford University Closer Look Series: Topics, Issues and Controversies in Corporate Governance and Leadership No. CGRP- 31
Proxy advisory firms are independent, for-profit consulting companies that provide voting recommendations to individual and institutional investors. Research shows that these firms have significant influence on voting outcomes. Given this influence, it is important that investors ensure that the policies of these firms are “accurate”—i.e., that they successfully and reliably differentiate between good and bad future outcomes.
In this Closer Look, we carefully examine the process by which proxy advisory firms formulate their voting policies. In doing so, we identify serious issues that raise questions about the accuracy of their recommendations.
How exactly do proxy advisory firms determine that a policy is “correct”?
Who participates in the policy development process with these firms? How do we know that their opinions are representative of shareholder broadly?
Why don’t proxy advisory firms disclose the research that supports each of their voting recommendations?