Proxy Advisory Firms: Information intermediaries or standard setters?

There is a growing concern among market participants that proxy advisory firms exert an outside influence on proxy voting outcomes. This potentially allows PAs to exert pressure on firms to adopt their preferred practices, which may not actually be in the best interests of shareholders. This research investigated how internal stakeholders view the role and influence of PAs via interviews with 43 PA representatives, board directors, HR executives and compensation consultants. The research found that PAs have a positive influence in terms of increased transparency and accountability around executive compensation but that , on the down-side, key company decision-makers view them as de facto standard setters. This can lead to Firms making changes to their executive compensation design — even ones that go against their compensation philosophy, do not align with shareholder interests, and may potentially hurt firm value — to avoid or reduce scrutiny from PA’s. Compromising the firm’s compensation philosophy to avoid PA scrutiny, align with PA recommendations, or win a proxy vote may result in short-term gains at the cost of long-term consequences.