One-Size-Fits-All: Voting Recommendations by Proxy Advisors

Abstract

Proxy advisors are often criticized for issuing “one-size-fits-all” voting recommendations, having severe conflicts of interests, and lacking transparency. We analyze a model that ties these features together. In equilibrium, one-size-fits-all recommendations emerge as a means to conceal the proxy advisor's conflict of interest and increase his influence on investors. Greater transparency reduces the incidence of one-size-fits-all recommendations, but may harm investors by diminishing proxy advisors’ incentives to collect information. The rise of common ownership and regulations that limit outsourcing of voting decisions to proxy advisors increase the prevalence of one-size-fits-all recommendations and may harm investors by diminishing their informativeness.

Keywords: One-Size-Fits-All, Proxy Advisors, Corporate Governance, Voting, Regulation Recommendation, Cheap Talk

JEL Classification: D74, D83, G23, G32, G34