Creating Controversy in Proxy Voting Advice

Abstract

The quality of proxy advisors' voting recommendations is important for policymakers and industry participants. We analyze the design of recommendations (available to all market participants) and research reports (available only to subscribers) by a proxy advisor, whose objective is to maximize its profits from selling information to shareholders. We show that even if all shareholders' interests are aligned and aim at maximizing firm value, the proxy advisor benefits from biasing its recommendations against the a priori more likely alternative. Such recommendations "create controversy" about the vote, increasing the probability that the outcome is close and raising each shareholder's willingness to pay for advice. In contrast, it serves the interest of the proxy advisor to make private research reports unbiased and precise. Our results help reinterpret empirical patterns of shareholders' voting behavior.

Keywords: proxy advisor, voting, sale of information, information design, Bayesian persuasion, controversy, bias, corporate governance

JEL Classification: D72, D82, D83, G34, K22