Improving the Transparency and Regulation of Proxy Advisory Firms

Chester Spatt, a distinguished senior fellow at the Golub Center, recently authored Proxy Advisory Firms, Governance, Market Failure, and Regulation in his capacity as a senior fellow at the Milken Institute for Financial Markets. The white paper explores reforms needed to bring transparency and accountability to proxy advisory firms, whose advice to institutional investors influences the outcome of shareholder votes on matters such as executive pay, acquisitions and board appointments.

The proxy advisory business, dominated by Institutional Shareholder Services Inc. and Glass Lewis & Co., makes recommendations on how investors should vote on proposals put forward at corporate shareholder meetings. With little competition or oversight, the recommendations of proxy advisory firms are vulnerable to conflicts of interest and ideological bias. Although such firms play a key role in corporate governance, they are subject to little regulation. The white paper recommends the firms should provide advice aimed at maximizing shareholder value rather than other considerations. Spatt calls for reforms such as requiring proxy advisory firms to improve disclosure of potential conflicts of interest, to enhance the explanation of the reasoning behind recommendations, and to allow companies to respond to recommendations before investors vote. The reforms could follow several paths, including Congressional action, the imposition of regulatory rules or guidance, or through industry-led development of best practices.