A Theory of Proxy Advice when Investors Have Social Goals

52 Pages Posted: 27 Mar 2020 Last revised: 7 Apr 2021

See all articles by John G. Matsusaka

John G. Matsusaka

University of Southern California - Marshall School of Business; USC Gould School of Law

Chong Shu

University of Utah - David Eccles School of Business

Date Written: April 6, 2021

Abstract

This paper studies the conditions under which the proxy advice market helps and hinders corporate governance. A key assumption is that investors are heterogeneous, with some focusing only on returns while others also have nonpecuniary goals, such as environmental sustainability and protection of human rights. Proxy advisory firms compete for business by choosing a scale of production, price, and “slant” of advice. Heterogeneous demand creates pressure for the market to offer an array of advice, but there is a countervailing force: when demand is sufficiently large, suppliers adopt a “platform” technology and consolidate into a natural monopoly. Under conditions that seem empirically relevant, the platform monopolist slants its advice toward the preferences of investors with non-value-maximizing goals, thereby steering corporate elections away from value maximization. We characterize the conditions under which the proxy advice market succeeds and fails, discuss policy reforms that would help it succeed, and develop normative principles for assessing proxy advice when value maximization is not the sole objective of investors.

Keywords: Proxy advice, socially responsible investing, corporate voting, shareholder rights

JEL Classification: G3,G18,L1,L21

Suggested Citation

Matsusaka, John G. and Shu, Chong, A Theory of Proxy Advice when Investors Have Social Goals (April 6, 2021). USC Marshall School of Business Research Paper, Available at SSRN: https://ssrn.com/abstract=3547880 or http://dx.doi.org/10.2139/ssrn.3547880

John G. Matsusaka (Contact Author)

University of Southern California - Marshall School of Business ( email )

Department of Finance & Business Economics
Los Angeles, CA 90089
United States
213-740-6495 (Phone)
213-740-6650 (Fax)

USC Gould School of Law

699 Exposition Boulevard
Los Angeles, CA 90089
United States
213-740-6495 (Phone)

Chong Shu

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

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