June 20, 2006
Correlating Proxy Advisory Firm Recommendations with Voting Results
by Bill Baue
A look at the link between recommendations by Institutional Shareholder Services, Glass Lewis, and
PROXYGovernance and voting results at Citigroup, Chevron, ExxonMobil, and Wal-Mart.
After SocialFunds.com posted its two-part article in April comparing proxy
recommendations by the three major proxy advisory firms at Citigroup (ticker: C) and Chevron (CVX), USNews & World Report business reporter Kim
Clark called to say she had never seen such a comparison. If information on this relationship is
indeed rare in the media, then what about the next step in the relationship--namely, between
recommendations and actual vote outcomes? There must be some degree of correlation, because most
institutional investors--pension funds, mutual funds, endowments, and the like--base their proxy
votes on recommendations by the major advisory firms--Institutional Shareholder Services (ISS), Glass Lewis, PROXYGovernance. However,
mapping the correlations is extremely complicated.
"We do not track vote outcomes versus
recommendations--clients own 100 percent of the voting decision and it's impossible to determine
what factors trigger those decisions," said Jim Letsky, senior analyst with ISS. "ISS clients
subscribe to a variety of policies, therefore recommendations across policies can, and often do,
"Additionally, we manage 300 custom client policies, and recommendations are made
according to the client's guidelines," Mr. Letsky told SocialFunds.com. "Finally, since many
investors use multiple proxy advisors, it's impossible to know how they weighed each of our
Bob McCormick, vice president of proxy research and
operations at Glass Lewis, cites similar reasons why his company follows the same course, as well
as adding additional reasons.
"We have not attempted to track any correlation between our
recommendations and voting outcomes simply because we do not think it is relevant," Mr. McCormick
told SocialFunds.com. "Our clients, like those of other voting agents, may vote the same as Glass
Lewis recommends for very different reasons than Glass Lewis and therefore we do not feel that
determining the potential correlation would be very illuminating or helpful because the numbers may
be skewed due to these coincidental voting similarities."
Comparing recommendations across
the three advisory firms to the voting results at four companies--Citigroup, Chevron, ExxonMobil
Wal-Mart (WMT)--illustrates some correlations
and confounds others.
"We see a high 'correlation' between our recommendations and the
vote outcomes as, at each company, the social proposal that we supported got the highest support
level of the social policy questions on the ballot at that company," said Scott Fenn, managing
director of policy at PROXYGovernance. "However, we are not so naive to believe that our
recommendation is what is 'causing' these high votes and correlations."
believe that our analytic methods and approach to these issues are in step with what investors
truly care about--the tangible impact of some, but not all, social issues on shareholder value,"
Mr. Fenn told SocialFunds.com.
Indeed, PROXYGovernance recommended voting for the
sexual orientation non-discrimination resolution (along with ISS but not Glass Lewis) at
ExxonMobil, where it received 34.6 percent support--the second highest result of the 13 shareholder
resolutions filed there.
PROXYGovernance recommended in favor of the resolution asking Chevron to adopt a human rights
policy (along with ISS but not Glass Lewis, again) that received 25 percent support, the
second-highest of six shareholder resolutions filed there.
However, stepping back to include the governance resolutions undermines such a correlation.
For example, PROXYGovernance recommended voting against a resolution requesting performance-based
equity pay at Citigroup (where ISS and Glass Lewis recommended for it) that received 49.7 percent
confounding factor is the difference in results on the same resolution at different companies. For
example, all three proxy advisory firms recommended voting for the majority vote director elections
resolution (including ISS's standard and SRI platforms) at ExxonMobil and at Wal-Mart. However,
the measure received 52.2 percent support at ExxonMobil (leading the company to consider adopting
it) while it received only 22.4 percent support at Wal-Mart.
"Bear in mind that the Walton family owns 40 percent of the stock, which
explains the relatively low support level," said Shirley Westcott, managing director of policy at
PROXYGovernance. At ExxonMobil, in contrast, insiders hold zero percent of floating shares.
This example illustrates the multiplicity of factors bearing in on the relationship
between proxy advisory recommendations and vote outcomes. Clearly, the attempt to correlate
recommendations to voting outcomes is a Herculean (if not Sisyphean) task--whether it is irrelevant
or unilluminating, however, is another matter altogether.