A Defense of Proxy Advisors

Proxy advisors have dramatically transformed shareholder voting. Traditionally, even large institutional investors tended to follow the Wall Street Rule — vote with management or sell your stock — because the economics did not justify incurring any expense in deciding how to vote. The emergence of proxy advisors who perform proxy research for a modest fee paid by each of thousands of institutions now enables these investors to vote intelligently. New laws and rules have also expanded the range of matters on which shareholders vote. Because of these developments, business managements can no ignore but must cater to shareholder interests. However, corporate managers resent being dethroned. They are mounting a campaign to press the SEC to impose new regulations to hobble proxy advisors and, thereby, to neutralize institutional shareholders. This article reviews the charges leveled against proxy advisors and the new regulations proposed by their critics. It finds the complaints mostly unwarranted. Institutional investors are sophisticated and market forces minimize any problems with proxy advisors. With a few minor exceptions, new regulations are not needed and would be counterproductiv