Sharon Hannes is Professor of Law and Dean of the Faculty at Tel Aviv University Buchmann Faculty of Law; Asaf Eckstein is Lecturer on corporate law and securities law at Ono Academic College. This post is based on their recent paper.
In our new paper, we propose a novel framework for an incentive pay scheme for proxy advisory firms. Proxy advisory firms play an influential role and wield extensive influence over major corporate decisions in the United States and all over the world. The leading proxy advisory firms—Institutional Shareholder Services (“ISS”) and Glass, Lewis & Co. (“Glass Lewis”), which together account for 97 percent of the industry—were said to be “de facto corporate governance regulators,” or “de facto arbiters of U.S. corporate governance,” and their voting recommendations were described as “a milestone” for many crucial deals. As once noted by Chief Justice Leo Strine:
[P]owerful CEOs come on the bended knee to Rockville, Maryland, where ISS resides, to persuade the managers of ISS of the merits of their views about issues like proposed mergers, executive compensation, and poison pills.
The recognition of the major role played by proxy advisory firms has also sparked much criticism. Above all, critics have accused proxy advisors of having no “skin in the game.” Despite their great influence over companies’ votes and practices, proxy advisory firms “have no economic interest in the companies for which they are giving their recommendation.”
