Say-on-Pay Votes Are ‘Working’ | Chief Investment Officer

(March 29, 2012) — Listed companies are taking increasing notice of proxy voting advisory firms when shaping the executive pay packages that are put to shareholders for approval, research published this week has found.

Listed companies are realising in growing numbers that the advisory firms’ advice has become more important to shareholders, a survey by The Conference Board, Nasdaq and The Rock Center for Corporate Governance at Stanford University has found.

The survey said: “The survey results clearly show that companies do respond to the ‘say-on-pay’ (SOP) policies adopted by proxy advisory firms. The majority of companies determine in advance whether their executive compensation programs are likely to receive a favourable recommendation from Institutional Shareholder Services (ISS) or Glass Lewis; and companies are likely to make changes to a program in anticipation of a negative recommendation from these firms. “

All areas of the compensation program are affected, the survey found, including disclosure, guidelines, and plan structure and design—although the degree to which these areas are affected varies considerably.

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The Dodd-Frank Act requires public companies allow shareholders the opportunity to cast an advisory vote on executive compensation- this is not a binding vote, but rejection of the vote is often viewed badly by shareholders and the market at large.

ISS and Glass Lewis were highlighted in the survey as having influence on companies in the United States. The two firms were reported to offer the same advice on votes 75% of the time, offering substantial influence over a company vote.

During the 2011 proxy season, no company that received a positive recommendation from ISS failed its SOP vote, and 12% of companies that received a negative recommendation from ISS failed their SOP vote.

“Evidence suggests that institutional investors respond to the voting recommendations of proxy advisory firms. For example, a negative recommendation from ISS, the largest proxy advisory firm, has been shown on average to influence between 13.6% and 20.6% of votes cast on management-sponsored proposals,” the survey said.

During the 2011 proxy season, 72% of companies reviewed the policies of a proxy advisory firm or engaged with them to receive feedback or guidance on their proposed executive compensation plan.

In the United Kingdom, the National Association of Pension Funds (NAPF) this week launched a joint initiative with Hermes Equity Ownership Services (EOS), under which pension fund investors will conduct open dialogue with some of the largest listed companies over their executive pay arrangements.

Equal-weighted portfolio of stocks in the major US equity indices with monthly rebalancing outperforms value- and price-weighted portfolios, a new report claims.

(March 28, 2012) — “Why does an equal-weighted portfolio outperform value- and price-weighted portfolios?,” asks a newly released report.

According to the authors — Yuliya Plyakha and Grigory Vilkov of the Goethe University of Frankfurt and Raman Uppal from the EDHEC Business School — the higher systematic return of the equal-weighted portfolio comes from its higher exposure to the market, size, and value factors. The report continues: “The higher alpha of the equal-weighted portfolio arises from the monthly rebalancing required to maintain equal weights, which is a contrarian strategy that exploits reversal and idiosyncratic volatility of the stock returns; thus, alpha depends only on the monthly rebalancing and not on the choice of initial weights.”

The report compares the performance of equal-, value-, and price-weighted portfolios of stocks in the major US equity indices over the last four decades. While an equal-weighted portfolio has greater portfolio risk, the report asserts that equal-weighted portfolios with monthly rebalancing outperform value- and price-weighted portfolios in terms of total mean return, four factor alpha, Sharpe ratio, and certainty-equivalent return.

“The total return of the equal-weighted portfolio exceeds that of the value- and price-weighted because the equal-weighted portfolio has both a higher return for bearing systematic risk and a higher alpha measured,” the report says. However, the equal-weighted portfolio has a higher volatility (standard deviation) and kurtosis compared to the value- and price-weighted portfolios.

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The conclusion: “The results…imply that the source of the superior performance of the equal- weighted portfolio is its significantly higher mean return, along with its less-negatively skewed returns.”

To complete the analysis, the authors constructed equal-, value-, and price-weighted portfolios from 100 stocks randomly selected from the constituents of the S&P500 index over the last 40 years.

Click here to download the full report.