Abstract:When institutional investors hire proxy advisors to prepare reports on matters up for vote at public company shareholder meetings, are they interested primarily in acquiring a bottom-line recommendati...When institutional investors hire proxy advisors to prepare reports on matters up for vote at public company shareholder meetings, are they interested primarily in acquiring a bottom-line recommendation on how to vote, on which they can then blindly rely? Or in acquiring information that will help them make their own voting decisions? Supporters of controversial reforms introduced by the Securities and Exchange Commission (“SEC”) in 2019 and 2020 gravitate toward the former position, arguing reform is needed to discourage undue reliance on proxy advisor recommendations. Opponents gravitate toward the latter position, arguing that additional regulation generally is unnecessary given that institutional investors already review their proxy advisors’ work product and make their own voting decisions.
This article argues that neither of these accounts presents a full picture of proxy advisors’ role in shareholder voting, and puts forward a more nuanced account that better reflects existing empirical evidence: institutional investors tend to use proxy advisors first and foremost as issue spotters, helping them distinguish (i) controversial matters that require a review of the proxy advisor’s analysis and potentially other information sources from (ii) non-controversial matters where they can vote in line with the proxy advisor’s recommendation without undertaking further review. On this account, proxy advisors do influence shareholder voting, but this influence derives primarily from their ability to direct institutional investors’ attention away from some proposals and toward others, not from institutional investors’ following their recommendations in lockstep.
This has significant implications for proxy advisor regulation. Most prominently, it casts in a new light one common criticism of proxy advisors’ standards—that they reflect a one-size-fits-all approach to corporate governance that results in recommendations that do not reflect each public company’s unique circumstances—exposing potential problems that are unaddressed by the SEC’s reforms. At the same time, it suggests that many of the reforms introduced by the SEC, predicated on an assumption that blind reliance on proxy advisor recommendations is a serious problem, address problems that likely are illusory.Read More
Publication Year: 2020
Publication Date: 2020-10-02
Language: en
Type: article
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Cited By Count: 1
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