Bad Company! The Assumptions Behind Proxy Advisors' Voting Recommendations

Abstract

The corporate governance challenge for Canada is to improve the quality of its corporate performance, which has been declining relative to its international peers for decades. This is quite different from the usual assumption that corporate governance is primarily a matter of controlling managerial self-dealing. While important, board monitoring of management is only one aspect of its role in a corporation; research suggests corporate governance arrangements have a significant impact on corporate outcomes, particularly in areas such as innovation where Canada lags.

Third-party proxy advisory firms, which provide advice to institutional investors in Canada on corporate governance matters, have grown in influence over the past decade. As securities regulators consider whether (and how) to treat them, an examination of the assumptions that underlie these advisors’ voting recommendations, and the influence these assumptions have on corporate decision-making, suggest these assumptions create perverse governance incentives and are contradicted by empirical research.

Keywords: corporate governance, proxy, securities, capital markets

JEL Classification: K22, K20