ISS struggles to identify low quality compensation practices during peak proxy season, says study

Institutional Shareholder Services (ISS), the dominant proxy and investment advisory firm in the US, is less effective at identifying poor remuneration practices during peak proxy season – the period from April to June when a substantial number of public companies hold their annual meetings – compared to the off-season, a new study has found. 

The study, by academics at Harvard Business School, Boston College and Boston University, was based on Russell 3000 data from 2010 to 2016. It showed that firms that received an ‘against’ recommendation from ISS on Say on Pay during the busy season exhibited higher profitability compared to firms with ‘for’ recommendations. In contrast, firms with remuneration practices opposed by ISS in the off-season had poorer profitability compared with firms that received ISS backing.

It was suggested that the practice of hiring “temporary, and potentially less experienced analysts” during the busy season contributed to the “lower quality assessments…given the complexity of compensation packages”.

Assuming that firm performance is influenced by the quality of its compensation practices, researchers concluded that “the quality of ISS’s recommendations appears to be hurt by its workload”. It was also suggested that the practice of hiring “temporary, and potentially less experienced analysts” during the busy season contributed to the “lower quality assessments…given the complexity of compensation packages”.

Notably, a comparison with the voting positions of BlackRock, Vanguard and State Street Global Advisors found evidence that the fund houses were better than ISS at identifying poor compensation practices. A vote against Say on Pay by at least two of the fund managers, despite a ‘for’ recommendation by ISS, was correlated with lower future profitability, said researchers.

ISS declined to comment on the study’s findings.

It comes as proxy advisors face increased scrutiny from US financial regulators as part of a wider crackdown on ESG-focused investing from the current administration. The Securities and Exchange Commission, headed by Trump associate Jay Clayton, recently approved new restrictions on how proxy firms publish their advice in an attempt to rein in their influence.