My critique of proxy advisory firms has ruffled some feathers over at The Corporate Library, the leading corporate governance research company.
Here’s how they characterize my argument:
"So, to recap: proxy advisors are too powerful, so we should worry and the government should step in. No, they're actually not powerful at all, so we should worry that they are creatures of government regulation and so the government should regulate more.
No it's okay for them to be influential when they're recommending votes consistent with management recommendations but not when they oppose management entrenchment or enrichment or externalization of costs. Isn't it fascinating that whether they are influential or not, the solution is always the same."
The Corporate Library is badly misreading my two posts on proxy advisors. Nowhere in either post did I call for more government regulation of the advisors. In truth, I think that more government regulation would be a terrible idea.
The flaws in the business of proxy advisory firms do not readily avail themselves to a regulatory cure. In the first place, the flaws are the result of other regulations. Piling on more is unlikely to help things.
More importantly, however, regulating proxy advisors would create barriers to entry from new firms. This would turn the existing proxy advisors into an anti-competitive, oligopolistic cartel. Granted government protection from competition, the advisors would produce worse advice. In short, regulating proxy firms would just exacerbate the problems with proxy advisory firms.
We saw this happen with credit ratings agencies. One set of regulations basically guaranteed that corporate clients would have to patronize the ratings agencies. This meant that the purchasers of their services were not shopping for quality but for compliance. Another set cartelized the business, locking out competitors. The result was absolute disaster.
We’re halfway there in the case of proxy advisors. Regulations more or less require mutual funds and other institutional investors hire proxy advisors. The demand for their services is rooted in regulatory compliance rather than a genuine desire for good advice. As a result, the advice can be expected to be lower quality than it would otherwise.
Pretty much the only way to make this situation worse would be to regulate away competitive pressures to maintain some advisory standards.
Read Carney's previous posts on proxy advisory firms:
- Why You Should Be Worried About Proxy Advisory Firms
- If Proxy Advisors Don't Really Matter, Why Do They Exist?
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