Proxy Advisors: A Double-Edged Sword for Institutional Investors

Abstract

Institutional investors who own shares in hundreds of companies and have heavily diversified portfolios face significant challenges. More importantly, investee companies usually organise their annual general meetings at the same time, which creates a huge logistical and administrative workload for institutional investors. Also, the “free riding” is also a frequent problem, which greatly reduces the incentive for institutional investors to participate in corporate governance. Hence, the proxy advisors were introduced because of two factors: regulatory policies demand and market demand. Proxy advisors do have a lot to offer to corporate governance, and many empirical studies have demonstrated that proxy advisors play an important role in director elections, say-on-pay and ESG. However, there are some negative effects, such as the multiple conflicts of interest, ineffective and incomplete information and insufficient transparency, institutional investors’ over-reliance on proxy advisors. In addition to having an impact on corporate governance, proxy advisors have a significant effect on the engagement of shareholders. There are three main points. Firstly, proxy advisors stimulate institutional investors' participation in corporate voting through lowering the costs. Secondly, proxy advisors mitigate the collective action dilemma of institutional investors, and the third one is about the robo-voting problem. From the discussion of the essay, the impact of proxy advisors on shareholder engagement is significant, and while there is a degree of negative impact, the positive impact of proxy advisors is more significant and should be sustained and improved.