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The proxy advisory and corporate governance industry plays a significant role in shareholder voting and in the formulation of corporate governance policy. The industry operates with relatively little accountability and virtually free from regulatory oversight. Understanding the relationship between this industry and mutual funds, who in the aggregate are the largest owners of publicly traded shares in the United States, is critical to understanding issues of shareholder rights, the meaning of the right to vote in corporate elections, and the role that institutional investors, like mutual funds, play in the corporate landscape.

Mutual funds exercise their substantial voting power by outsourcing key voting functions and corporate governance decisions to the proxy advisory industry. By far, the largest player in the industry is Institutional Shareholder Services (n/k/a RiskMetrics Group, Inc.) (ISS), which is estimated to advise half the world’s common stock. This paper examines the factual and theoretical implications on our corporate polity of using proxy advisers like ISS. The paper addresses the problem from an agency theory perspective and argues that the current relationship between mutual funds and third-party agents like ISS is conceptually at odds with corporate law agency theory. In addition, it is a relationship that has practical implications for public companies, long-term shareholders, and our corporate landscape in general.