ISS Recommendations and Mutual Fund Voting on Proxy Proposals

Abstract

We analyze voting data from five proxy seasons (2003-2008) to identify the extent to which shareholders generally, and mutual funds in particular, vote in accordance with the voting recommendations of RiskMetrics’ ISS Corporate Governance Services. We look at voting by all shareholders and voting decisions by mutual funds on non-election and non-routine proxy proposals - both those submitted by management and those submitted by shareholders. We find that shareholders generally tended to vote more consistently with ISS voting recommendations than management recommendations during this period, with more consistency among mutual funds than all shareholders. We also find that independent voting is unusual: Shareholder voting and, even more so, mutual fund voting decisions generally follow either the recommendations of management or of the ISS. Mutual fund voting decisions are consistent with ISS recommendations more frequently than management recommendations, whether the proposal is submitted by management or by shareholders, and whether relating to anti-takeover issues or corporate governance issues. Our univariate results are confirmed by multivariate regressions that examine the weight mutual funds give to ISS recommendations. In short, ISS has an impact on voting by shareholders generally and, across the board, an even greater impact on voting by mutual funds.