Article Highlights Common Questions About the Role of Proxy Advisors

In a recently published paper, two authors from the Corporate Governance Research Initiative at Stanford Graduate School of Business examine the role and function of proxy advisors. The authors note that the proxy advisory space has grown exponentially over the years and has come to rely on two main firms, Glass Lewis and Institutional Shareholder Solutions (ISS). The authors contend that it is unclear whether their exercise of influence in shareholder proxy votes is “beneficial, benign, or harmful.” The paper outlines the role of proxy advisory firms broadly, highlighting that initially they worked as “information intermediaries, with proxy firms offering the benefit of economies of scale to aggregate and analyze information that would be costly for individual investment firms to replicate on their own.” The paper delves into the influence the firms have in shareholder elections and how they test the validity of those recommendations. The paper also has a section devoted to how proxy advisory firms assess board candidates, it focuses on corporate directors but has applications for fund directors. The authors note that beyond Glass Lewis statements around analyzing director independence and performance and ISS which adds board composition and accountability, “we do not know how proxy advisors measure the effectiveness of a director at the individual, committee, or board level.” The article also touches on the role ISS and Glass Lewis have played in the ESG investing space and whether they are truly independent.

Click here to read the article “Seven Questions about Proxy Advisors.”