Carnegie Mellon University


June 13, 2019

Milken Institute Report Calls for Oversight of Proxy Advisory Firms

Noelle Wiker

Chester Spatt, Senior fellow and Pamela R. and Kenneth B. Dunn Professor of Finance, says improving the transparency and regulation of proxy advisory firms could benefit investors and strengthen markets.

Reforms are needed to bring transparency and accountability to proxy advisory firms, whose advice to institutional investors influence the outcome of shareholder votes on matters like executive pay, acquisitions, and board appointments, according to a new Milken Institute white paper. 

Because proxy advisory firms have little competition or oversight, their recommendations are vulnerable to conflicts of interest and ideological bias, explains Chester S. Spatt, former chief economist of the U.S. Securities and Exchange Commission and author of “Proxy Advisory Firms, Governance, Market Failure, and Regulation.” Spatt, a senior fellow at the Milken Institute Center for Financial Markets, is the Pamela R. and Kenneth B. Dunn Professor of Finance at Carnegie Mellon University’s Tepper School of Business and the Golub Distinguished Visiting Professor of Finance at the MIT Sloan School of Management.

“The role of the proxy advisory firms is arguably among the most crucial for corporate governance, but they are subject to very little regulation,” Spatt writes. “Proxy advisory firms should make recommendations that maximize shareholder value, but their advice sometimes reflects other considerations.”

The proxy advisory business, dominated by Institutional Shareholder Services Inc. and Glass Lewis & Co., makes recommendations on how investors should vote on proposals put forward at corporate shareholder meetings. Their influence has grown as more institutional investors seek their advice rather than internally bearing the cost of doing research.

The paper calls for reforms such as requiring proxy advisory firms to improve disclosure of potential conflicts of interest, to enhance the explanation of the reasoning behind recommendations, and to allow companies to respond to recommendations before investors vote. The reforms could follow several paths, including Congressional action, the imposition of regulatory rules or guidance, or through industry-led development of best practices.

“Through our programs and research, we engage with public and private sector leaders in order to support the development of capital markets to broaden economic opportunity and financial inclusion,” said Michael Piwowar, executive director of the Milken Institute Center for Financial Markets. “Chester’s research is prompting thoughtful conversations on how we might strengthen capital markets and serve investors.”

The role of proxy advisory firms was among the various issues examined during the 2019 Milken Institute Global Conference. In coming months, the Center for Financial Markets will continue to meet with interested parties as policies are developed for proxy advisory firms and other issues that impact U.S. capital markets.