Proxy advisors as regulatory spawn

Cite this Article
Larry Ribstein, Proxy advisors as regulatory spawn, Truth on the Market (October 26, 2010),

John Carney comments on the rise of proxy advisory firms.  He attributes this partly to increasing complexity caused by the securities industry.  He notes the irony that “[r]eforms to securities regulations that were ostensibly intended to empower shareholders or further ‘shareholder democracy’ have instead resulted in increasing domination of proxy questions by a small clique of advisors.”  Of course this irony is to be expected, since shareholders’ rational passivity renders the whole “democracy” notion simply an artifact of regulators’ imagination.

So, as Carney says, this is really about firms’ protecting themselves from proxy regulation requiring institutional investors to vote in their clients’ interests.  The funds cover their rear ends by “outsourcing” the decisions to “a small clique of advisors” whose interests may be more aligned with certain large institutional investors than with small investors the rules were supposed to help.

Even worse, Carney notes the “frightening parallels” between proxy advisors and credit rating agencies, who also “saw the demand for their services grow largely due to demand driven by regulation. Because the demand was not driven by genuine market demand for analysis, ratings agencies were able to profit while providing poor credit analysis.”

In better world, we would get competition among many different governance models, enabled by state law.  In the world to which we are rapidly moving, we get one-size-fits-all federal regulation overseen by a rigid oligopoly.

I should note that these problems aren’t new.  Four years ago, in my review of Paul Rose’s Corporate Governance Industry, I noted that the institutional investors paying for advice from firms like ISS and Glass Lewis, were buying “criticism insurance.” They were protected not only from the regulators, but from critics like Gretchen Morgenson.