The Changing Landscape of Corporate Governance Disclosure: Impact on Shareholder Voting

Many mutual funds satisfy their fiduciary duty to vote on portfolio firms’ directors by following the recommendations of proxy advisory service companies such as ISS. However, companies complain that ISS recommendations are misguided. A rational response to such frictions would be for firms to decrease investors’ costs of evaluating directors’ expertise. Consistent with this conjecture, we find that firms increasingly disclose directors’ expertise in image-based formats.These disclosures lead to less reliance on ISS, particularly in cases where ISS’s recommendations tend to be less precise. An analysis of the channels underlying the higher voting support reveals both the upside and downside of these image-based disclosures: on average these disclosures are informative, but they also facilitate window dressing.