Why Do Proxy Advisors Wield So Much Influence? Insights From U.S.-U.K. Comparative Analysis
Bottom Line: Four explanations—the role of institutional investor trade groups, the level of agreement on governance best practices, the strength of shareholder rights, and the role of the state—help explain proxy advisors’ greater influence in the United States. They also have implications for proposed reforms.
The factors usually cited for proxy advisors’ influence exist similarly in the United Kingdom. But in the U.K., proxy advisors exert significantly weaker influence than they do in the United States. With proxy advisor reform on the regulatory agenda, this paradox warrants attention, and yet most scholarly contributions have focused on the extent of proxy advisors’ influence rather than the reasons for it.
Comparative study may be more fruitful than studying the United States in isolation because the comparative inquiry helps control for factors in common with other systems and points to unrecognized legal, institutional, and other features that may be taken for granted or obscured in a single-system study.
First, U.K. institutional investors have benefited from significantly stronger institutional investor trade groups. These groups have coordinated institutional investors, collectivizing their voting power and diminishing the need for and space available for proxy advisors. In the United States, to a significant extent, proxy advisors serve as functional substitutes for trade groups.
Second, corporate governance issues that are settled in the United Kingdom remain open—and are often vigorously contested—in the United States, which requires U.S. investors to make decisions that call for expertise and amplifies investors’ incentives to turn to third parties for information and voting guidance. Essentially, what market participants in the United Kingdom regard as uncontroversial or settled in their best practice governance codes is still a source of dispute for their U.S. counterparts.
Third, U.K. institutional investors have stronger rights as shareholders than their U.S. counterparts. These conditions have facilitated collective action by U.K. institutional investors, magnified their incentives to form trade groups, and made them more likely to coordinate their activities through trade groups than through proxy advisors.
Finally, the state has played different roles in each system. In the United Kingdom, it has pushed for institutional investors to collectively influence corporate managers and has sometimes unambiguously threatened regulatory intervention unless they do, whereas in the United States it has exhibited suspicion of powerful institutional investors by imposing regulatory barriers to concerted action.
Perversely, by resisting stronger shareholder rights and opposing reform on governance issues, U.S. corporate managers may have strengthened the proxy advisory firms that many of them now seek to weaken.
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