The Road to Shareholder Power

Abstract

A dramatic rise in shareholder power and improvements in corporate governance can be achieved in the next few years by expanding the role of proxy advisory firms. This will require changing the way such firms are paid. They are now paid directly by investors who buy their advice; but this arrangement suffers from a free-rider problem. Instead, they should be paid by each corporation about which they are advising, in accordance with shareholder vote so as to preclude management influence. Any proxy advisor other than the market leader (ISS) stands to gain tremendously by initiating this new system. It would eliminate the natural monopoly feature of the current system, and spread the cost more equitably across all shareholders. It would also enable proxy advisory firms to market their services to individual investors via the internet.