What are proxy advisory firms and what is their effect on corporate governance?

Recent changes to corporate governance laws allow shareholders the ability to add information to corporate proxies. As a result, proxy advisory firms have assumed an important role in the shareholder proxy solicitation and notification process. These firms propose governance standards for corporations. They encourage corporations to adopt and comply with those standards by sending information to all corporate shareholders about the corporations governance. 

These standards will indicate when directors adhere to or deviate from the proposed governance standards. They may also include a recommendation for director elections. This practice pressures directors to conform to governance standards or face a recommendation from the advisory firm against election or re-election. These firms serve a very important function by informing shareholders who otherwise lack the ability or motivation to learn about directors proposed by the nomination committee of the corporation.

Note: Activist shareholders may employ proxy advisory firms to promote their agenda to shareholders.

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