ISS’s Proxy Voting Guidelines and ROE Management

Abstract

We examine the impact of the proxy voting guidelines of the Institutional Shareholder Services (ISS) on managers' opportunistic reporting behaviours. In January 2015, the ISS introduced a new advisory guideline based on firms' return on equity (ROE), and started to recommend that shareholders should vote against the proposed director election for firms whose ROE is lower than 5%. Focusing on this benchmark, we find that managers are more likely to achieve this threshold since the publication of the guideline and, in particular, they do so by accrual management and increased dividends. Moreover, firms with higher institutional ownership are more likely to beat the threshold. This paper thus contributes to the literature by providing new evidence that earnings management can be motivated by a unique soft law and detects managers' discretions in the context of ROE.

Institutional Investors and Corporate Governance

“…Both firms make voting recommendations based on general voting guidelines, which are usually for specific countries. 53 Some early evidence on how firms try to game the specific rule that are described in these guidelines is provided in Ishida and Kochiyama (2020). Other firms offering proxy voting advice include US firms Egan-Jones Proxy Services, Segal Marco Advisors, and ProxyVote Plus; Swiss firms SWIPA and Ethos; UK firm Minerva; and the French firm Proxinvest.…”