A Theory of Proxy Advice when Investors Have Social Goals

Abstract

This paper develops a theory of the proxy advice market when some investors have nonpecuniary goals such as environmental sustainability and protection of human rights. We assume advisory firms choose their scale of production, price, and “slant” of advice to attract investors with heterogenous preferences over returns and social goals. When the market for advice is small, the industry equilibrium consists of small “boutique” firms that provide a wide array of types of advice, and voting outcomes reflect the distribution of investor preferences. When the market is large, the industry reduces to a single advisory firm using a platform technology, the firm’s advice is slanted toward the preferences of funds with non-value-maximizing goals, and voting outcomes overrepresent the preferences of activist funds. We discuss normative principles for assessing proxy advice when value maximization is not the sole objective of investors.