Abstract
Proxy advisors play a beneficial role in the US and the UK where share ownership is dispersed. They also bring problems, namely the distortion of proxy advice by conflicts of interest and one-size- fits-all advice. Proxy advisor’s market power calls for more regulation. But regulation must not drive out proxy advisors and the benefits they bring. This paper proposes that proxy advisors should be regulated by market discipline. The key to effective market discipline is to enhance institutional investors’ incentives to vote informatively and to assess the quality of proxy advice. To this end, this paper proposes that institutional investors should have a regulatory duty based on public interest to vote informatively on shareholder proposals to promote long-term corporate value. The duty would be enforced by end investors’ market discipline, strengthened by disclosure on the funds’ part and investor education. This paper also suggests alternative methods to regulate proxy advisors in markets with concentrated share ownership.
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