US study researches extent that ISS identifies poor remuneration practices
09/11/2020
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Institutional Shareholder Services (ISS), is the world’s largest proxy adviser, and as such, has a significant influence on remuneration resolution votes. In Australia this is particularly pertinent for the large proportion of overseas institutional investors in ASX 300 companies which rely on ISS. How informative are voting recommendations from ISS, and how useful are their “against” votes at identifying poor remuneration practices? This is the premise of a recently published study in the US.

In the US context, at least, as it turns out, they can be very useful. That is, ISS “against” votes can identify low quality remuneration practices in companies, and these are associated with poorer future company performance. Interestingly however, this ability seems to apply only to companies that have financial years that do not end in December. It is noted that ISS’s recommendations dip in quality purportedly due to the resource-intensive nature of analysing the vast majority of companies’ remuneration practices with December year ends.

Noting the difficulty in establishing a benchmark for quality, the study authors looked at defining poor remuneration practices by assuming such practices are associated with worse accounting performance. Accounting performance is preferred over total shareholder return, because accounting performance eliminates the possibility that investors react to unfavourable recommendations and other unrelated information.

The study also found that ISS was better than shareholders at identifying poor remuneration practices. Through the use of Say-on-Pay (SOP) voting outcomes, the authors found that “against” recommendations were associated with lower levels of performance – independent of SOP voting outcomes. However, this finding again applied only to non-December end companies in the US.

Interestingly, the study found that the three largest asset managers are not unthinking sheep, blindly following proxy advisers’ recommendations with regard to voting. Blackrock, Vanguard and State Street Global Advisors proved better at identifying poor remuneration practices than even ISS. Where ISS voted favourably, a “No” vote from even one of the three asset managers was associated with poorer future performance for firms.

See HERE for the full study.

© Guerdon Associates 2021
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