Third-Party Institutional Proxy Advisors: Conflicts of Interest and Roads to Reform

Abstract

With the rise of institutional activist investors in recent decades—including a purported 495 activist campaigns against U.S. corporations in 2016 alone—the role that third-party institutional proxy advisors play in corporate governance has greatly increased. The United States Office of Government Accountability estimates that clients of the top five proxy advisory firms account for about $41.5 trillion in equity throughout the world. For several years, discussions have developed regarding conflicts of interest faced by proxy advisors. For example, Institutional Shareholder Services, the top proxy advisory firm in the world, frequently provides advice to institutional investors on how to vote proxies while simultaneously providing corporate clients with advice on how to improve their corporate governance. Situations like these have given rise to debate as to whether such conflicts are truly problematic. At a minimum, institutional investors must be confident in the services that are provided to them by proxy advisors. Without a showing that recommendations are given in a neutral and non-biased way, accidentally or intentionally, the system cannot work effectively to maximize shareholder fairness. This Note posits that, despite the fact that third-party proxy advisors are currently acting within the law, reforms should be made that better address and limit the amount of conflicts of interest that may arise as a result of their business. Such reform should take place through legislation, informal SEC notice and comment, or, potentially, through the voluntary action of proxy advisory firms.