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IPE special report May 2018

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Third of institutions do not use proxy data in investment decisions

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A third of institutional investors do not use data and analysis collected for proxy voting when deciding to buy or sell stock investments, research shows.

The survey, conducted among 64 US asset managers and owners, revealed only 59% used proxy voting data to influence decisions on buying and selling individual companies.

The report from Stanford Business School in California said investors were very confident in proxy voting increasing shareholder value, with a score of 7.2 from 10, however, 34% said the foundations to decisions were not considered when making investment decisions.

When information was used, investors said performance metrics, pay for performance alignment and corporate governance profiles were most useful.

In order to make proxy voting decisions, investors relied mainly on proxy statements, internal analysis or third-party advice, with only 58% directly engaging with the company.

Majority of investors said portfolio managers only became involved in voting decisions around a quarter of the time – and mainly in M&As, contested director nominations and executive compensation.

Some 54% said proxies allowed them to make informed decision on compensation, while 58% believed say on compensation was an effective way to influence company pay policies.

David Larcker, professor at Stanford, said investors are still frustrated with compensation levels and whether they are justified.

Only 21% of investors said chief executive compensation was appropriate and linked to performance. Only a quarter understood executive compensation and long-term performance plans.

“These are significantly negative perceptions of executive compensation,” Larcker said.

“’Say on Pay’ is having some effect, engaging shareholders in a discussion about plan design. However, investors are still frustrated with pay levels overall and whether the packages awarded today are justified.”

Some 57% of investors said it was not clear how proxy statements disclosed the chief executive pay ratio to other employees, with 35% lamenting disclosures on corporate social responsibility and succession planning.

Two-thirds said the relationship between compensation and risk was not clearly disclosed by companies, as 48% suggested whether compensation size was appropriate was also not clear.

Aaron Boyd, director of governance research at Equliar, an executive compensation information firm, said: “Corporations must do a better job of articulating the rationale behind [compensation] plan design.

“Companies should take renewed effort to be clear and concise in explaining their choices.”

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