Proxy advisory firms such as Institutional Shareholder Services and Glass, Lewis & Co. play an important role in our capital markets. They advise institutional investors how to vote in shareholder meetings and often have a dramatic influence on the outcome. Such immense power, however, has sparked concern and calls for regulation, given that proxy advisors have no skin in the game. In this Article we propose a novel framework for an incentive pay scheme for proxy advisors within the highly important M&A context that would align their incentives properly. In short, instead of their current flat-fee arrangements, part of proxy advisors’ fees would be used to create the following incentive framework: if proxy advisors recommend their clients vote “AGAINST” an acquisition, and shareholders accept their recommendation, proxy advisors should be placed in a long position on the stock of the target. Consequently, proxy advisors would gain if share prices eventually pass the acquisition price and lose if they do not. However, if proxy advisors recommend shareholders vote “FOR” an acquisition, and shareholders nevertheless reject the takeover bid and advice, proxy advisors should be placed in a short position on the stock. They would lose if share prices eventually pass the acquisition price and gain if they do not. In this Article we discuss how to implement and promote this proposal.
