There is substantial evidence that an against vote recommendation from ISS will lower support levels for say-on-pay proposals (22% on average in 2020, 28% on average in 2019). However, the evidence on whether ISS gets these votes “right” is more mixed. In this context, right means whether an against vote recommendation is associated with worse future industry-adjusted performance.
A recent paper by Ana M. Albuquerque, Associate Professor of Accounting at Boston University Questrom School of Business, Mary Ellen Carter, Associate Professor of Accounting at Boston College Carroll School of Management, and Susanna Gallani, Assistant Professor of Business Administration at Harvard Business School examined if ISS is able to identify poor compensation practices as compared to subsequent performance.
The paper finds that ISS is generally able to identify poor compensation practices. But the paper contains a notable caveat. The findings are only correlated for companies with a non-December fiscal year end. Approximately 70-75% of companies have a December FYE.
The paper speculates that workload pressure may damage the quality of ISS vote recommendations. It notes that ISS typically has hired temporary staff to address workflow and those staffers may lack the necessary experience to provide high-quality assessments of pay and performance (many lack any previous business and financial experience or education). The study covers a period from 2010 to 2016. Over that period, ISS actively tried to shift from the temporary staffing model to a higher level of permanent employees. However, they have continued to struggle with retention with many employees leaving after 3-5 proxy seasons.
The paper found that the largest three fund companies—BlackRock, Vanguard and State Street Global Advisors—are better than ISS at identifying poor compensation practices. Future performance is lower for firms that have at least one of the fund companies voting against the pay package, even when ISS recommends “For”.
The authors touch on the recently finalized SEC rules to reform proxy advisors. Specifically, they note the rules may have not gone far enough. Companies with December fiscal year ends might have benefited from the opportunity to comment on ISS recommendations, given the effect of resource challenges that it faces in the busy proxy season.