Enhancing the Value of Shareholder Voting Recommendations

Summary of Study

Bottom Line: Greater use of board voting recommendations versus the current predominance of recommendations provided by proxy advisors are needed. The voting recommendations provided by the board are simply more informed and therefore much more precise. 

Investment advisers have a fiduciary duty to vote. However, the provision of voting recommendations by proxy advisors that are uninformed and therefore insufficiently precise should not be their only option. Investment advisors and other institutional investors should always be in a position of making a sufficiently precise vote, whether or not a proxy advisor can help them. 

Analogous to the corporate law’s business judgment rule, voting recommendations provided by the board of directors creates a presumption of being sufficiently informed and precise. Yes, significant bias may exist in some of these voting recommendations, but overall this is the best source of sufficiently informed and precise voting recommendations. 

The same presumption would apply to the voting recommendations provided by proxy advisors if they can attest to using an information trader standard when generating their recommendations. Moreover, bias may exist in these voting recommendations as well. 

How can such institutional investors become informed voters without requiring them to read massive amounts of information on the hundreds or thousands of companies they have invested in for the thousands, tens of thousands, or even hundreds of thousands of shareholder votes they are confronted with each year?

A critical step in resolving this issue is maximizing the ability of institutional investors to avail themselves of voting recommendations that are made on an informed basis and with the expectation that they will lead to shareholder wealth maximization. One way to achieve this maximization is to make sure that the voting recommendations provided by proxy advisors are truly informed ones. This leads to the recommendation that the proxy advisor should be held to the standard of an information trader. Another way is for the SEC to recognize the value of board recommendations and explicitly state that their use will allow investment advisers to meet their fiduciary duties when voting their proxies. 

In addition, a voting recommendation provided by a proxy advisor that is based on a board’s voting recommendations should be disclosed as such. If not, then the investment adviser will be misled into believing that the proxy advisor is providing an independent source of voting recommendations. Given such disclosure, the client may want to go somewhere else for an independent third party recommendation. 

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