Proxy Advisors as Issue Spotters

(2021) 15:2 Brooklyn Journal of Corporate, Financial & Commercial Law 371–419

49 Pages Posted: 3 Dec 2020 Last revised: 11 Feb 2022

See all articles by Douglas Sarro

Douglas Sarro

University of Toronto, Faculty of Law

Date Written: October 2020

Abstract

When institutional investors hire proxy advisors to prepare reports on matters up for vote at public company shareholder meetings, are they interested primarily in acquiring a bottom-line recommendation on how to vote, on which they can then blindly rely? Or in acquiring information that will help them make their own voting decisions? Supporters of controversial reforms introduced by the Securities and Exchange Commission (SEC) in 2019 and 2020 gravitate toward the former position, arguing that reform is needed to discourage undue reliance on proxy advisor recommendations. Opponents gravitate toward the latter position, arguing that additional regulation generally is unnecessary given that institutional investors already review their proxy advisors’ work product and make their own voting decisions.

This article argues that neither of these positions presents a full picture of proxy advisors’ role in shareholder voting, and puts forward a more nuanced account that better reflects existing empirical evidence: institutional investors tend to use proxy advisors first and foremost as issue spotters, helping them distinguish (i) controversial matters that require a review of the proxy advisor’s analysis and potentially other information sources from(ii) non-controversial matters where they can vote in line with the proxy advisor’s recommendation without undertaking further review. On this account, proxy advisors do influence shareholder voting, but this influence derives primarily from their ability to direct institutional investors’ attention away from some proposals and toward others, rather than from institutional investors’ following their recommendations in lockstep.

This account casts one common criticism of proxy advisors’ standards—that they reflect a one-size-fits-all approach to corporate governance that results in recommendations that do not reflect each public company’s unique circumstances—in a new light that exposes potential problems unaddressed by the SEC’s reforms. At the same time, it casts doubt on the usefulness of many of the reforms introduced by the SEC, which appear to be predicated on the flawed assumption that blind reliance on proxy advisor recommendations is a serious problem.

Keywords: Proxy advisors, corporate governance, securities regulation, Securities and Exchange Commission, institutional investors

JEL Classification: K22

Suggested Citation

Sarro, Douglas, Proxy Advisors as Issue Spotters (October 2020). (2021) 15:2 Brooklyn Journal of Corporate, Financial & Commercial Law 371–419, Available at SSRN: https://ssrn.com/abstract=3699227

Douglas Sarro (Contact Author)

University of Toronto, Faculty of Law ( email )

Toronto
Canada

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