Milken Institute report calls for oversight of proxy advisory firms

Improving the transparency and regulation of proxy advisory firms could
benefit investors, says senior fellow and former SEC chief economist
Chester Spatt

WASHINGTON–(BUSINESS WIRE)–#executivepay–Reforms are needed to bring transparency and accountability to proxy
advisory firms, whose advice to institutional investors influence the
outcome of shareholder votes on matters like executive pay,
acquisitions, and board appointments, according to a new Milken
Institute white paper.

Because proxy advisory firms have little competition or oversight, their
recommendations are vulnerable to conflicts of interest and ideological
bias, explains Chester S. Spatt, former chief economist of the
U.S. Securities and Exchange Commission and author of Proxy
Advisory Firms, Governance, Market Failure, and Regulation
. Spatt, a
senior fellow at the Milken Institute Center for Financial Markets, is
the Pamela R. and Kenneth B. Dunn Professor of Finance at Carnegie
Mellon University’s Tepper School of Business and the Golub
Distinguished Visiting Professor of Finance at the MIT Sloan School of

“The role of the proxy advisory firms is arguably among the most crucial
for corporate governance, but they are subject to very little
regulation,” Spatt writes. “Proxy advisory firms should make
recommendations that maximize shareholder value, but their advice
sometimes reflects other considerations.”

The proxy advisory business, dominated by Institutional Shareholder
Services Inc. and Glass Lewis & Co., makes recommendations on how
investors should vote on proposals put forward at corporate shareholder
meetings. Their influence has grown as more institutional investors seek
their advice rather than internally bearing the cost of doing research.

The paper calls for reforms such as requiring proxy advisory firms to
improve disclosure of potential conflicts of interest, to enhance the
explanation of the reasoning behind recommendations, and to allow
companies to respond to recommendations before investors vote. The
reforms could follow several paths, including Congressional action, the
imposition of regulatory rules or guidance, or through industry-led
development of best practices.

“Through our programs and research, we engage with public and private
sector leaders in order to support the development of capital markets to
broaden economic opportunity and financial inclusion,” said Michael
, executive director of the Milken Institute Center for
Financial Markets. “Chester’s research is prompting thoughtful
conversations on how we might strengthen capital markets and serve

The role of proxy advisory firms was among the various issues examined
during the 2019 Milken Institute Global Conference. In coming months,
the Center for Financial Markets will continue to meet with interested
parties as policies are developed for proxy advisory firms and other
issues that impact U.S. capital markets.

Spatt is available to discuss the report and its findings. To schedule
an interview, contact Noelle Wiker at the Carnegie Mellon University
Tepper School of Business at 412-268-4204 or


Milken Institute
Geoffrey Baum, Director of
Media Relations
(310) 570-4689;

Carnegie Mellon University Tepper School of Business
, Assistant Director of Communications and Media Relations

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