Firm Responses to Proxy Advisor Recommendations: Evidence from Supplemental Proxy Filings

Abstract

Proxy advisors play a key role in shareholder voting, with negative proxy advisor recommendations leading to significant voting dissent against management proposals. We examine firms’ decisions to respond to Against recommendations on Say-on-Pay proposals by Institutional Shareholder Services (ISS) and Glass Lewis (GL), the most influential proxy advisory firms. We find that approximately 10% of firms respond to these recommendations by filing a DEFA14A, a supplementary proxy filing; firms are more likely to respond if ISS or both proxy advisors recommend Against than if only GL does. Larger firms and those with more institutional ownership are more likely to file DEFA14As. The typical filing contains over 2,000 words and discusses compensation, firm performance, the link between pay and performance, and the selection of peer groups by proxy advisors. We document positive market reactions in the two-day window around the filing date when both proxy advisors recommend Against, but do not find filings are associated with more favorable voting outcomes after controlling for the underlying concerns expressed by ISS. One explanation is shareholders cast their votes promptly after proxy advisors issue their reports and before firms can respond with supplemental filings.