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New academic research from a group of influential investment experts, including an adviser to the Norwegian sovereign wealth fund and legal consultant for the Dutch government, finds that institutional investors feel proxy advisors help them make better voting choices, but they ultimately remain their own decision makers.
This contradicts a view that shareholders ‘blindly follow’ proxy advisors’ advice, as exemplified earlier this year when JPMorgan’s CEO Jamie Dimon called shareholders ‘irresponsible’ and ‘lazy’ for following advisors’ recommendations. Others, such as former SEC Commissioner Dan Gallagher, have claimed the use of proxy advisers means investment professionals are less likely to do their own research.
But, new research Behind the Scenes: The Corporate Governance Preferences of Institutional Investors, finds that investors that use proxy advisors engage their portfolio companies more intensively through “voice”, in that it gives them material for engagement and decision-making.
It is written by influential academics in the international finance world. Joseph A. McCahery, an economics professor at Tilburg University, has served as a legal consultant for the Netherlands Ministry of Finance and the OECD. Laura Starks, a professor at the University of Texas, is an independent director for CREF Retirement Accounts and TIAA–CREF Mutual Funds,serves on the investment advisory committee for the Employees Retirement System of Texas, and has also served on the 2013 Strategy Council and the 2014 Expert Panel for the Norwegian Government Pension Fund.
Zacharias Sautner is professor at Frankfurt School of Finance & Management. Prior to that he worked as research fellow in finance at the Saïd Business School of the University of Oxford.
They quizzed 143 very large institutional investors on their company engagement, the efficacy of exit threat, and use of proxy advisors.
The study finds that institutional investors with a long-term focus, say that “voice”, especially when conducted behind the scenes, is highly important.
Further, investors usually engage because of a firm’s corporate governance or strategy than over short-term issues.
On the threat of “exit”, selling shares, the research finds that 42% of investors feel it is effective in disciplining management.
The research also focuses on the ‘controversial’ role of proxy advisors; 60% of respondents use them. These investors say that they help them make better voting decisions, but that they remain very much their own decision makers.
However, the majority of investors surveyed do feel that proxy advisors are exposed to conflict of interests. And 22% of the respondents agree or strongly agree that proxy advisors should be regulated.