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Voting advisors benefit from controversy



“Bad news is good news.” This adage has been used in the newspaper industry to accuse the press of only looking at the bad. And this is true to some extent, because most of the news that matters to us is the one that has consequences that affect us directly and that are usually bad. This tension is what piques our human interest and makes information attractive. A study by the Stephen M. Ross School of Business at the University of Michigan discovered that “proxy advisers” – in “Spanish voting advisers” – are the firms that specialize in recommending to institutional investors what the meaning of shareholder meetings should be, they suffer from journalistic bias and in an attempt to maximize profits from selling information For shareholders, they align their recommendations against the most likely alternative, creating controversy in every vote. The advisor benefits from manipulating the general signal and recommending an unexpected alternative. Agent advisors are increasingly important in the corporate world. The world’s largest advisory firm, Institutional Shareholder Services (ISS), works with 1,500 institutional investors, who have cast more than 12 million votes at 45,000 shareholder meetings around the world. The second company on the market, Glass Lewis, founded in 2003, has 1,300 clients that it advises in more than 30,000 meetings that involve shareholder decision-making. The agent has decisive influence in two ways: through their voting recommendations, which are usually public, and through private, paid and shared reports only. It usually ends up being public when it is posted by the person benefiting from the voting recommendation, whether it is the company’s management or the active shareholder, but not always. This creates a fundamental conflict of interest. Agents make money from paid reports, not generic recommendations. If the latter succeeds in containing all the elements of judgment necessary for the voting report, no one will buy the report and the advisor’s profit will be zero. What types of recommendations and reports increase the profits of a proxy advisor? That’s what the authors of the “Creating Controversy in Proxy Voting Advice” study, Andrei and Nadia Malenko of the University of Michigan and Chester Spatt of Carnegie Mellon University have raised. Academics say there is no clear answer. It may happen that the consultant makes general recommendations aimed at strengthening his own reporting or acts impartially. We show that an agent’s benefit from selling information is maximized if (1) designs a fully informative and unbiased report, and (2) makes a general recommendation that is partially informative but biased against the alternative in which it is a priori likely that value will increase (provided that the a priori probability to increase the value high enough.) We refer to this bias against the most likely alternative as “argumentative.” By manipulating the public signal and recommending the often unexpected alternative, the advisor increases the likelihood of a vote approaching, and thus increases each shareholder’s willingness to buy search report. The authors give an example of one of the most popular votes, the appointment of a member of the council. If the candidate is clearly good for the company and the “agent” only talks about him in the wage report, but does not give information publicly, then investors who know nothing about the report will vote based on the positive record and agree with it. . Since all non-subscribers tend to vote the same way, voting won’t be soon. Therefore, if an investor were to consider signing up for the report, they would have little incentive to do so because the likelihood of their informed vote being affected is low. Suppose instead that the advisor makes partially informed recommendations and raises controversy about the advisor. In this case, unsubscribed investors who see a negative recommendation will not know whether the advisor is good or bad and will not know how to vote. This results in a high probability of a vote taking place soon, which increases incentives to buy the report in order to have more information to make a decision. New Strategies Companies are using new strategies and channels of communication to find shareholders and get their votes. Tik Tok begins to outdo ‘proxy advisors’. The case of two American companies developing electric cars – Nikola and Lucid – is emblematic. Both turned to social media and YouTube to garner support from their contributors. A 2021 Charles Schwab survey found that 15% of American investors started investing in 2020 and get more information from social networks than from the professional press. Biased recommendations in this way are ideal for “proxy” and dominate any other design. In addition, the consultant will produce informative and unbiased research reports as they help you increase revenue from fees charged to subscribers. In this case, the goals of the proxy advisor and the shareholders who buy their reports are perfectly aligned. Not so in the case of general recommendations which, according to the study, may be biased towards creating controversy. The incentive to create such disagreements disappears when the probability that a proposal will be good for the company exceeds 50%.

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