Shareholder Democracy and the Market for Voting Advice

In corporate elections, most votes are cast based on advice provided by for-profit voting advisory companies. We develop a model of the voting advice market to explore how competition and demand for advice shape the slant of the advice offered. In the model, advisory firms compete through prices and the procedure by which they generate advice. Shareholders have heterogeneous goals, differing in the weight they place on financial returns versus nonfinancial (“social”) returns, such as reductions in carbon emissions. We assume that investors vote for expressive reasons and may differ in how much they care about voting correctly. In equilibrium, advising firms segment the market and tailor their advice to reflect the preference of their average investor. We show how the profit maximizing goals of advisory firms can skew voting outcomes away from the outcomes that would prevail if investors had free access to full information. In particular, we define conditions such that advisory firms skew their advice and the voting outcome in favor of a minority of investors who have a strong preference for nonfinancial returns. We also study how increasing competition affects equilibrium outcomes.