The current proxy advisory system — in which proxy advisors make recommendations to investors and asset managers on how they should vote on shareholder proposals — has evolved into a deeply perverse mess. This has yielded adverse outcomes for investors, retirees, and firms, and for the economy as a whole, as a result of inefficient investment and an aggregate capital stock less productive than otherwise would be the case.

This state of affairs has come to pass because of a series of regulatory decisions and politicized interpretations of the relevant statutes over many years. One would think that those offering advice to business firms and investment fund managers would be required to serve the fiduciary interests of those to whom such advice is given. One would be wrong: The pursuit of political power through financial regulation — that is, the ability to use other people’s money to achieve preferred policy outcomes — has resulted in a duopoly of two firms in the provision of proxy advisory services. These are Institutional Shareholder Services and Glass Lewis.

These proxy advisors have no fiduciary responsibilities to investors or fund participants. Accordingly, they have strong incentives to use proxy advice to further their own political and policy preferences. The result has been a wave of proxy proposals promoting ESG or “environmental, social, and governance” objectives, the central examples of which are........

© The Hill