Outsourcing Corporate Governance: Conflicts of Interest and Competition in the Proxy Advisory Industry

60 Pages Posted: 29 Jun 2013 Last revised: 16 Mar 2014

See all articles by Tao Li

Tao Li

University of Florida - Department of Finance, Insurance and Real Estate

Date Written: November 12, 2013

Abstract

Proxy advisors, private firms that help institutional investors decide how to vote their shares, play an extremely powerful role in shaping corporate governance. However, investors and policymakers are concerned about undesirable features of the industry, especially potential conflicts of interest. In this paper, I model how conflicts of interest may arise when a proxy advisor provides services to both investors and corporate issuers on the same governance issues. I then study how increased competition can alleviate these conflicts. Using a unique data set on voting recommendations, I show that the entry of a new advisory firm reduces favorable recommendations for management proposals by the incumbent advisor, which is consistent with our theory as the incumbent is subject to conflicts of interest by serving both investors and corporations. These results shed light on the policy debate on whether and how to regulate the proxy advisory industry.

Keywords: Proxy advisory firms, conflicts of interest, competition

JEL Classification: D43, D82, G34, L15

Suggested Citation

Li, Tao, Outsourcing Corporate Governance: Conflicts of Interest and Competition in the Proxy Advisory Industry (November 12, 2013). ECGI - Finance Working Paper No. 389/2013. Available at SSRN: https://ssrn.com/abstract=2287196 or http://dx.doi.org/10.2139/ssrn.2287196

Tao Li (Contact Author)

University of Florida - Department of Finance, Insurance and Real Estate ( email )

Warrington College of Business
Gainesville, FL 32611
United States

HOME PAGE: http://warrington.ufl.edu/contact/profile.asp?WEBID=7628

Register to save articles to
your library

Register

Paper statistics

Downloads
797
Abstract Views
3,890
rank
29,706
PlumX Metrics