Solving the Proxy Advisory Problem: Minimum Regulation for Maximum Competition

The proxy advisory industry is often criticized on two primary accounts: the lack of accountability for informational accuracy in the development of voting standards and the conflicts of interest faced by advisors when they make proxy voting recommendations on issuers to which they have previously provided corporate governance consulting services. The industry has also been accused of having “anemic” levels of competition, since only two advisors command a vast majority of the market share. While much has been written about curtailing the prevalence and effects of proxy advisor conflicts of interest through increased regulation, the regulatory route toward increased informational accuracy is less clear. This Article proposes a single regulatory framework that aims to tackle the industry’s informational accuracy issue by increasing competition. To set the stage, this Article briefly discusses the rise of the industry as well as its modern structure before describing historical factors and barriers to entry that have helped perpetuate the industry’s consolidation. This Article then examines academic studies concerning the effects of competition in the proxy advisory industry before describing considerations necessary for effective regulation due to the industry’s unique nuances and extensive entry barriers. Lastly, it proposes a novel regulatory structure aimed at increasing informational accuracy in proxy advisor recommendations by incentivizing competition while keeping regulatory costs to a minimum.