Disciplinary power in corporate governance: A Foucauldian analysis of the emergence and development of proxy advisors

Abstract

Prior research in corporate governance has extensively investigated the mechanisms through which a variety of actors (financial analysts, investment managers, shareholder activists) monitor and discipline corporate executives. However, one recently emerged actor has received little attention so far: the proxy advisory firm. Mobilising Foucault’s concept of disciplinary power, this study uses historical analysis to examine the role of proxy advisors in corporate governance. This article shows that proxy advisors actively contributed to developing and implementing disciplinary mechanisms. This involves (1) hierarchical observations of corporations and their executives on a global scale. These observations are made available to institutional investors on proxy advisors’ voting platforms which have Panopticon-like features; (2) normalisation of judgements through the provision of generic voting policies, generic voting recommendations and corporate governance ratings prepared by proxy advisors and delivered to many institutional investors; (3) ritualised examination of the performance of corporations and of their executives during the annual general meeting, including record-keeping of all past voting results.

Keywords

corporate governance disciplinary power proxy advisor surveillance

Introduction

First emerging in the 1970s (Ocasio and Joseph, 2005; Shah and Napier, 2019), corporate governance has gone through tremendous changes during the past decades. Codes of corporate governance have flourished worldwide (Roberts, 2001a), issues of executive compensations (e.g. Conyon and Sadler, 2010) and board structure (Klein, 2002) have been highly debated and shareholder engagement has been widely promoted (Gifford, 2010). Of particular interest is the role of a variety of actors (financial analysts, investment managers, shareholder activists) that contribute to shape and implement corporate governance practices. While the roles of these latter have been extensively investigated, new business organisations aiming at improving corporate governance have been thriving in the past decades (Stein, 2008) and have often received little attention. This study focuses on one of these actors: the proxy advisory firm (PA). Specifically, it relies on historical analysis to investigate the role of PAs – from their emergence in 1972 to the present day – in the field of corporate governance.

Following the significant rise in institutional investors from the 1960s (Clark and Van Buren, 2013), the first PA, Investor Responsibility Research Center Inc. (IRRC) was created in 1972 in the United States. Then other PAs emerged in the mid-1980s in the United States and progressively in Europe and Australia in the 1990s. By collecting, aggregating, and analysing companies’ annual general meeting (AGM) resolutions and related documents, PAs develop research reports and voting recommendations that help their clients make an informed voting decision on AGM resolutions such as the election of directors or executive compensation. The two largest PAs – Institutional Shareholder Services (ISS) and Glass, Lewis & Co (GL) – are both from North America but have a global network. They hold a market share of around 97 per cent in the United States and are dominant in Europe too (European Securities Markets Authority (ESMA), 2012). Other PAs are much smaller and often specialise in a national/regional market, especially in Europe (ESMA, 2012).

Since 2010, PAs have been under intense scrutiny from regulators around the world as they are accused of acting as quasi-regulators of corporate governance practices (e.g. Brannon, 2019). By focusing on PAs’ voting recommendations, academic studies have documented that PAs have some level of influence on institutional investors’ votes and therefore indirect influence on corporations and their executives (Alexander et al., 2010; Bethel and Gillan, 2002; Cai et al., 2009; Choi et al., 2010; Hitz and Lehmann, 2017; Larcker et al., 2013). Other studies evidence a more direct influence of PAs on corporations through the promotion of best practices on topics such as executive compensation (Ertimur et al., 2013; Hayne and Vance, 2019). By highlighting that PAs exercise some direct and indirect influence on corporations and their executives, these studies suggest that PAs may discipline corporate executives. However, prior studies focus on one or two services provided by PAs but do not consider how the wide range of services provided by PAs may produce specific disciplinary effects.

By taking a historical perspective and mobilising Foucault’s (1977) notion of disciplinary power, this article highlights how PAs progressively developed a broad range of services and shows that PAs strongly contributed to the development and rise of disciplinary structures to monitor corporations and their executives. First, PAs contributed to implementing a systematic hierarchical observation of corporations and their executives on a global scale. Starting with research reports on social and political issues, PAs expanded their analysis of corporations to corporate governance issues. Quickly, the scope of analysis has broadened in terms of the number of issues covered, the number of corporations analysed in the United States and worldwide, and the number of individual executives assessed and compared. These observations are gathered on the voting platforms set up by PAs to service institutional investors. The platforms resemble Panopticons, enabling investors to receive ‘surveillance’ information on many corporations and their executives in a single place without being seen and subsequently process their voting decisions. Second, PAs participated in normalising judgement on a range of corporate governance issues by publishing generic voting policies, providing generic voting recommendations and preparing corporate governance ratings. With ISS and GL having an overwhelmingly dominant market share, many institutional investors receive and may make decisions based on the same information (voting recommendations or ratings). As such, the normalising effect is amplified by the oligopolistic nature of the PA industry. Third, PAs play a key role in the ritualised examination that AGMs represent. PAs generic voting policies may be relied upon by executives to prepare for the AGM. PAs’ vote agency services enable institutional investors to execute their votes and carry out the ‘marking’ of the ‘exam’, with the percentage of the votes supporting management resolutions being the mark obtained. PAs also keep track of all AGM results (past and present), thereby placing individuals and corporations into a ‘field of documentation’ (Foucault, 1977: 189).

This article contributes to the literature on corporate governance in several ways. First, it answers the call for more historical studies in corporate governance (Lai et al., 2019) and contributes to enhancing our understanding of the evolution of corporate governance (Cheffins, 2013; Ocasio and Joseph, 2005; Shah and Napier, 2019). As argued by Lai et al. (2019: 329), ‘historical studies on governance may provide visibility to the social processes and ideologies that explain how capitalism evolved (Walker, 2016), thereby extending our knowledge of contemporary forms of governance’. By relying on historical analysis, this study shows how the services and tools provided by PAs were progressively expanded to meet the demand of investors in a context where ideas of monitoring and disciplining executives became prevalent. Ultimately, this progressive expansion resulted in the implementation of a network of surveillance technologies that increased the disciplinary power of investors on corporate executives, thereby constructing these latter as ‘governable persons’ (Miller and O’Leary, 1987). In contrast to the traditional corporate governance literature rooted in agency theory and a sovereign view of power (Roberts et al., 2006), this study provides an in-depth analysis of the ‘micro-physics of power’ (Foucault, 1977: 26) which helps us understand the current evolution and forms of corporate governance.

Second, this study adds to the corporate governance literature by investigating a new disciplinary force, the PA. It extends prior studies on PAs (Ertimur et al., 2013; Hayne and Vance, 2019; Hitz and Lehmann, 2017; Larcker et al., 2013) by providing qualitative insights into how PAs emerged and developed over time. While prior research focused on measuring the influence of PAs’ voting recommendations on institutional investors’ votes, this article proposes a broader analysis by focusing on the range of tools and techniques developed by PAs. Disciplinary effects on corporate executives are no longer only a matter of whether many institutional investors blindly follow the voting recommendations of ISS and GL. This study shows how the technologies developed by PAs hierarchise observations, normalise judgements about what constitutes good corporate governance, and enforce disciplinary power during a specific type of examination: the AGM. These results point to the importance of considering how these three techniques (hierarchical observation, normalisation, and examination) unfold and are combined to form an apparatus in which corporations and their key individuals have become the object of constant surveillance. As such, this study contributes to enhancing our understanding of the complex role played by PAs in corporate governance.

In the remainder of this article, how corporate governance has progressively evolved into a disciplinary project is first introduced. The third section presents Foucault’s (1977) key theoretical constructs to analyse the rise of disciplinary power. Then, the data and the research method used are presented. The fifth section describes how PAs progressively contributed to increasing the disciplinary pressure on corporate executives. The article concludes with a discussion of the main implications.

Background: corporate governance as a disciplinary project

The separation of ownership and control lies at the heart of the governance of the modern corporation (Berle and Means, 1932). This specific governance structure generates important information gaps that have been shown to be particularly problematic for investors (Jensen and Meckling, 1976). From the perspective of agency theory, managers are maximising opportunists who will take advantage of information gaps in their favour to misappropriate assets to the detriment of investors. Agency theory (Fama, 1980; Fama and Jensen, 1983; Jensen and Meckling, 1976; Ocasio and Joseph, 2005) is the grounding for the development of corporate governance and promulgates ideas of board monitoring and independence, alignment of the interests of executives and investors through stock compensations, and above all the concept of shareholder value maximisation (Lazonick and O’Sullivan, 2000). Modern corporate governance has thus developed as a disciplining project, aiming to set boundaries, if not eliminate managerial opportunism (Brennan and Solomon, 2008; Roberts, 2001b). Agency theory as the ‘dominant theorizing of corporate governance relationships’ Roberts (2001b: 1548) structures the relationship between actors (principals vs agents) in a hierarchical and disciplinary manner. The relation between investors and corporate executives is understood as being a power relation (Fligstein, 2016; Gendron, 2018).

Over the past few decades, the rise of institutional investors has profoundly modified the investment industry and the equity structure of companies and affected the power balance between investors and executives. The share of US equity owned by institutional investors has grown from 16 per cent in the 1960s to 73 per cent in 2013 (Clark and Van Buren, 2013). The demand for PA services first emerged with the development of ‘voicing’ as an investment strategy. It was also facilitated by the rising number of institutional investors and an associated professionalisation, as it were, of the investor’s role. Hirschman (1970) identifies two sorts of ‘recovery’ mechanisms through which customers or investors (principals in general) can express dissatisfaction: ‘exit’ and ‘voice’. For investors, ‘exit’ mostly means selling their shares (also known as the ‘Wall Street walk’). ‘Voicing’, on the other hand, means engaging in dialogue with management and exercising voting rights. Until the mid-1980s, ‘exit’ was the preferred and dominant strategy (Bew and Fields, 2012). It was then common practice for investors to approve the board of directors’ resolutions or to sell their shares if they were dissatisfied. Only a few activist investors realised at this stage that voting rights could be an effective tool to ‘voice’ concerns and make change happen within corporations.

Progressively though, the exit strategy became less of an option due to the development of passive investment strategies such as index funds (Bew and Fields, 2012). For sizable portfolios, active trading strategies were rather risky, since large sales of securities necessarily affect stock prices. In addition, passive investment strategies often include requirements to follow a specific investment allocation (e.g. index funds track a specific index). These investment restrictions coupled with the financial risks associated with the trading of large quantities of shares contributed to reduce the availability of the exit strategy.

In the meantime, regulatory changes provided an opportunity for the ‘voicing’ strategy to thrive. In 1974, the US Department of Labor introduced the Employee Retirement Income Security Act (ERISA) which legally obliged pension fund managers to implement a prudent investment approach in order to avoid breaching their fiduciary duty (US Department of Labor, 1974). To protect individuals who were members of employee benefit plans, ERISA reinforced the accountability of pension fund managers by imposing on them a duty of care, best interest, prudence, and loyalty (Richardson, 2013). These legally binding obligations were intended to better align the interests of both parties (Rave, 2013) and paved the way for the development of ‘fiduciary capitalism’ (Hawley and Williams, 1997).

By aggregating capital from several individual investors, institutional investors hold larger stakes in each company. This gives them enhanced monitoring and disciplinary power over corporate executives, and some institutional investors are determined to use this power. Jesse Unruh, State Treasurer and board member of CalPERS (the California Public Employees’ Retirement System, one of the largest pension fund in the world), contributed to the creation of the Council of Institutional Investors (CII) in 1985 with Harrison J. Goldin (New York City Controller) and John Konrad (State of Wisconsin Investment Board Chair). The aim of this organisation is to encourage oversight of their assets by shareholders. Its founders ‘also felt that by pooling their resources, institutional investors could use their burgeoning proxy power to hold companies accountable’ (Council of Institutional Investors (CII), 2015).

Institutional investors aggregate capital, but the PA is positioned one step above. By providing the same information and the same recommendation to many clients, PAs may influence the voting decisions of many institutional investors, thereby reinforcing those investors’ power over corporate executives. By aggregating influences, the PA may ultimately drive the behaviours and actions of corporations and their executives.

Theoretical underpinnings: surveillance and disciplinary power

Foucault claims that if disciplinary power has a model, it is the plague, which quarantines the infected individual behind closed doors and regulates, in multiple ways, the smallest details of his life (Bogard, 1991: 328).

From a Foucauldian perspective, the disciplinary project that dominates the current evolution of corporate governance can be understood as a willingness to ‘quarantine’ and punish the deviant corporations and the misbehaved executives, the ones who don’t contribute to maximising shareholder value. As noted by Roberts (2001a: 120), most corporate governance reforms initiated at a national level (e.g. Cadbury Commission in the United Kingdom) or at an international level (e.g. OECD, World Bank) in the 1980s and 1990s ‘can be seen to have been motivated by the desire to enhance the effectiveness of these disciplinary processes upon directors’.

While much of the prior literature has relied on agency theory to investigate mechanisms through which corporate executives can be monitored and controlled, this article relies on a different conceptualisation of power. As noted by Roberts et al. (2006),

Agency theory embodies what Foucault termed a sovereign view of power. The problem for shareholder principals is construed in terms of how they can affect their sovereign rights of ownership in relation to self-interested directors. (p. 281)

By relying on Foucault’s notion of disciplinary power, this article analyses power as being ‘exercised rather than possessed’ (Foucault, 1977: 26) and focuses on the instruments and techniques of disciplines that involve a ‘whole army of technicians’ (Foucault, 1977: 11). As such, it follows prior work in accounting that investigated how technologies and techniques of controls were deployed in the Papal State (Hoskin and Macve, 1986; Madonna et al., 2014) or within corporations (e.g. Miller and O’Leary, 1987, 1994). Specifically, this article considers the deployment of three main techniques that underlie disciplinary power: hierarchical observation, normalising judgement, and the examination.

The first technique, hierarchical observation, enables discipline by organising physical and analytical spaces and distributes accordingly individuals in those spaces. Individuals ‘subjected to a field of visibility’ (Foucault, 1977: 202) can then be constantly observed, assessed, and corrected if needed. As such, Bentham’s Panopticon represents an exemplary way to hierarchise and discipline:

The Panopticon is a machine for dissociating the see/being seen dyad: in the peripheric ring, one is totally seen, without ever seeing; in the central tower, one sees everything without ever being seen. (Foucault, 1977: 201–202)

While individuals in the Panopticon are always visible, the ones observing are invisible and individuals don’t know whether they are currently being observed. As such, the Panopticon enables constant surveillance. However, it does not mean that the ones observing are the ones holding power as explained by Foucault (1977):

The power in the hierarchized surveillance of the disciplines is not possessed as a thing, or transferred as a property; it functions like a piece of machinery. And, although it is true that its pyramidal organization gives a ‘head’, it is the apparatus as a whole that produces ‘power’ and distributes individuals in this permanent and continuous field. (p. 177)

The disciplinary power lies in the specific hierarchical structure. From a Foucauldian perspective, the disciplinary project in corporate governance cannot be reduced to a debate on whether shareholders hold more power than executives. It is necessary to consider the Panopticon-like structures that may subject corporate executives to a field of constant visibility.

The second technique is normalising judgement and relies on disciplinary punishment to train individuals and change their behaviour. It involves punishing but also rewarding expected behaviours, allocating good marks and bad marks. Foucault (1977) distinguishes five operations that contribute to normalising:

Comparing individuals with one another;

Creating a space for differentiation around a rule to be followed, a threshold to be met;

Quantifying the differences/gaps between individuals and hierarchising individuals;

Homogenising by constraining individuals to conform to the norm;

Delimiting the frontier between the ones conforming to the norms and the deviants, thereby leading to the exclusion of the deviants:

In a sense, the power of normalization imposes homogeneity; but it individualises by making it possible to measure gaps, to determine levels, to fix specialities and to render the differences useful by fitting them one to another. (Foucault, 1977: 184)

As such, grades and ranks are a central mechanism of the normalisation process, incentivising individuals to attain the top of the ranking and discouraging them to engage in behaviours that would lead to a rank decrease. This constant distribution of rewards and punishment also produces cumulative knowledge about everyone. From that perspective, corporate governance can be understood as a normalisation process where ‘good’ executives are to be rewarded and the ‘misbehaved’ ones are to be punished and re-trained.

The third technique is the examination which combines both hierarchical observation and normalising judgement. This ritualised assessment of individuals’ exercises disciplinary power on individuals. ‘The examination is at the centre of the procedures that constitute the individual as effect and object of power, as effect and object of knowledge’ (Foucault, 1977: 192). The grades and marks received by the student are documented and recorded, students’ academic performances are compared from one examination to the other and ranked against other student performances. As explained by Foucault (1977),

the examination that places individuals in a field of surveillance also situates them in a network of writing; it engages them in a whole mass of documents that capture and fix them. (p. 189)

From a Foucauldian perspective, the AGM is an examination in which a corporation and its executives are assessed by the shareholders and where directors’ proposal may ‘be sanctioned with shareholder votes’ (Roberts et al., 2006: 278). The AGM happens every year – with corporate executives preparing in advance for that examination (Johed and Catasús, 2018) – and follows ceremonial rituals (Davison, 2004). By exercising their voting rights, shareholders sanction or reward. For instance, shareholders can approve or reject the chief executive officer (CEO) compensation or the nomination of a new director. The results of the AGM are then recorded, appropriately documented, and broadly disclosed.

Research method

To understand how PAs may act as a disciplinary force in corporate governance, this article performs a Foucauldian genealogical investigation of the disciplinary techniques and procedures developed by PAs from 1972 to the present day. The data collected include both primary and secondary documents.

Data collection

In the first phase, the researcher aimed to develop an understanding of the PA industry and its current issues by gathering a broad range of primary documents published on the Internet around the time of the research in the mid-2010s. This includes press releases, reports, and other information published on the website of different PAs as well reports prepared by European and US regulators that discuss the potential regulation of PAs. Secondary documents such as press articles or blogs were also gathered. During the second phase – after gaining an understanding of the PA industry – the researcher sought to trace the historical emergence and development of PAs. By focusing on one PA at a time, the researcher gathered primary historical data to understand when and how PAs were created, how they developed over time, and which services were provided. Archival documents such as legal texts, annual reports, and research reports by the Investor Responsibility Research Center Inc. were retrieved from the Northwestern University Library where the author spent time as a visiting researcher. Additional background information on individual PAs (creation date, changes in ownership, and founders’ names) were obtained from Capital IQ. The researcher also relied heavily on Internet archives (https://archive.org/web/) to access historical captures of PAs’ websites at different times. Besides, interviews were conducted with informants well-acquainted with the PA industry to gain additional insights and further substantiate findings from the archival analysis.

As a starting point, the researcher used the list of respondents to the European Securities and Markets Authority (ESMA) regulatory consultation on possible policy options for the PA industry (ESMA, 2012) to identify informants working in or within the PA industry. Subsequently, snowball sampling principles were applied to identify and contact additional informants within and outside of Europe. Semi-structured interviews were conducted to gain insights into the historical emergence and development of PAs and their role in the corporate governance arena. As a priority, interviews were conducted with representatives of PAs given the empirical focus of the study on these actors. The PA industry comprises a very limited number of firms. For instance, in Europe, the Best Practice Principles group which gathers signatories of the Code of Conduct set by the PA industry only has six members. Out of these six PAs, five representatives of four PAs were interviewed. In addition, two representatives from one PA firm were also interviewed in the United States. Many of the interviewees from PAs are founders of their firm or joined the firm in the early years of its existence. Consequently, they are well-placed to provide a historical account of the emergence and development of the PA market over the past few decades.

Additional interviews were conducted with informants well-acquainted with the PA industry to obtain a broader perspective. A total of 19 semi-structured interviews were conducted in 2014 and 2015: 16 semi-structured interviews¹ in Europe (Paris, London, Brussels) and three semi-structured interviews in the United States. Most interviews were conducted in Europe. However, the PA industry first emerged in the United States. To overcome this potential limitation, three interviews were conducted in the United States, information was confirmed by reference to US primary data, and the European interviewees include representatives of US PAs that have offices in Europe. The great majority of interviews were conducted face to face (15 interviews), and the rest were conducted by telephone for reasons of convenience. The length of interviews varied between 24 minutes and three hours, with an average of 80 minutes as documented in Appendix 1.

In line with the general interview guide approach (Patton, 2002), the researcher prepared an agenda of 10 key topics to be discussed, while allowing the interviewee to raise any other topic she or he found relevant at the end of the interview. Key topics discussed included explaining the historical development of PAs, defining the current role of the PA, its responsibilities and duties, its relationships with issuers and investors, its (current and prior) approaches to corporate governance, and assessing current criticisms of PAs such as their excessive influence, lack of accountability, or conflicts of interest. To keep the conversation spontaneous, the interviewee could choose the order in which the issues on the agenda were discussed (Patton, 2002). At the end of the interview, the researcher checked that all the main topics had been covered. To guarantee the credibility of the data collected, all interviews were recorded with the permission of the interviewee, who was informed that his or her identity would be protected. Interviewees could also review the transcript and make amendments if necessary.

Data analysis

The data analysis was conducted iteratively throughout the research. First, the primary and secondary data were reviewed to identify specific dates about PA creation and development as well as specific events in the related institutional environment (e.g. the introduction of new regulations, shareholder activism, criticisms about PAs). This analysis was used to develop a simple timeline that captures in chronological order all relevant dates about the emergence and development of PAs. Second, the primary and secondary data as well as the academic literature on corporate governance and shareholder activism were reviewed again to gain a deeper understanding of what exactly happened during the different periods and how that may have affected the development of PAs. Interview transcripts provided useful insights in that regard. This analysis was added to the timeline and enabled the researcher to identify different phases in the emergence and development of PAs in terms of market expansion along with the progressive rise of criticisms on the role and influence of PAs. Third, the researcher mobilised Foucault’s notion of disciplinary power to analyse how PAs progressively contributed to enhancing discipline in corporate governance. Consistent with Foucault’s (1977) focus on the techniques and procedures of disciplines, primary and secondary data were re-analysed to identify when and how PAs introduced new services. Data retrieved from the Internet archives were particularly useful to gain insights on the features of PAs’ services as well as the rationales provided by PAs for introducing these services. This data analysis was added to the timeline previously constructed. Fourth, the revised timeline was analysed through Foucault’s three pillars of disciplinary power – hierarchical observation, normalisation of judgement, and examination – to identify critical turning points in the progressive tightening of the surveillance of corporations and their key individuals as enabled by PAs. Accordingly, an analytical account of the different services introduced by PAs is presented. These services progressively contributed to enhancing disciplinary power in corporate governance.

Historical analysis of PAs’ techniques and procedures of discipline

This section provides an analytical reconstruction of the historical emergence and development of PAs’ techniques and procedures of discipline and distinguishes five main periods. First PAs mobilised techniques aiming to enlighten shareholders. Second PAs progressively introduced techniques and procedures of discipline to scrutinise corporations. Third, PAs deployed techniques to normalise the judgement of shareholders. Fourth, PAs used calculative practices to discipline corporations and their executives. Last, these practices attracted some criticisms and triggered calls to increase the transparency of PAs.

Observing, analysing and keeping records to enlighten shareholders (1972–1980)

In the 1960s and 1970s, social and political activism had been on the rise in the United States and corporations became the targets of this activism (Heard, 1979). Shareholder activists initiated a range of resolutions to address the ‘social dimension of corporate performance’ (Vogel, 1983: 68). In 1970, at the time of the Vietnam war, the activist group called the ‘Medical Committee’ successfully obtained in court the right to propose a resolution to stop the production of Napalm at The Dow Chemical Company (IRRC, 2002). Around the same time, in 1969, ‘The Project on Corporate Responsibility’, a not-for-profit organisation based in Washington holding just 12 shares in General Motors, launched a proxy contest² to tackle the company’s environmental responsibility (Schwartz, 1971). These resolutions are also referred to as ‘public interest proxy resolutions’:

Public interest proxy resolutions originated in the social activism of the sixties and drew their political and ideological strength from the drive for increased public controls over the corporation that dominated the political agenda during much of the seventies. (Vogel, 1983: 69)

While the number of these types of resolutions grew rapidly in the early 1970s, many shareholders were uncertain about whether to vote in favour or against these social, political, or environmental resolutions and needed additional information.

The first PA emerged in that context to enlighten shareholders on social and political issues. The IRRC, a not-for-profit organisation was created in 1972 to fill this information gap following student protests on Harvard campus. Margaret Carroll – who helped to establish IRRC and had been executive director of IRRC for 20 years – was quoted in the Los Angeles Times (Zonana, 1991) as saying that ‘The precipitating factor was rising interest in the role of US businesses in South Africa’. In its detailed history, as disclosed on its website, IRRC mentions that the student protest was in relation to ‘Gulf’s [oil] presence in Angola [that] was supporting a repressive government’ (IRRC, 2002). Former Harvard University president Derek Bok was pressured by students to investigate these issues and pushed for the creation of IRRC as reported by a journalist:

‘He decided that Harvard, on its own, could not do this kind of intensive research every time one of these issues came up – and it was clear that more and more of them would come up’, Carroll said. Yale, Princeton, Oberlin, Stanford and Boston University immediately signed up. (Zonana, 1991)

As mentioned in this quote, universities and other institutional investors needed appropriate, relevant, and unbiased research to assess recurring complex social shareholder proposals. As explained by IRRC, by having one provider performing that research, economies of scale could be achieved and make the research more cost-effective for investors (IRRC, 2002). While IRRC analysed social and political issues, IRRC did not position itself as an activist organisation but as a provider of impartial information for institutional investors. Thus, IRRC (1982) mentioned in its 1981 annual report:

IRRC’s founders in late 1972 envisioned a centre that would provide impartial reporting and analysis to help institutional investors vote proxies on the social and corporate policy issues that arise in shareholder resolutions at corporate annual meetings. (p. 1)

This indicates that IRRC aims to provide impartial information that enables institutional investors to make informed decisions on the social issues affecting corporations. Stephen Farber, the special assistant to Harvard’s president Derek Bok announced the creation of IRRC in late 1972 and was the first chairman of IRRC. The not-for-profit organisation was initially financed through subscriptions as explained in the following quote:

The centre got underway with a staff of five and a budget raised from subscription fees charged to institutional subscribers. Its 14-member board of directors was chaired by Harvard’s Farber. The Ford, Carnegie and Rockefeller foundations paid higher fees the first year to get the organization off the ground. The rest of the budget came from more than 60 institutions, most of them colleges and foundations, but also including a few major financial institutions. (IRRC, 2002)

Counting many universities among its early subscribers, IRRC prepared a variety of research reports, such as reports on US firms’ investments in South Africa during the apartheid era (e.g. IRRC, 1979) and surveys of institutional investors’ votes on a range of social issues (e.g. Heard, 1979). Regular newsletters were also sent to subscribers such as the News for Investors that started in 1974 and was subsequently renamed Corporate Social Issues Reporter (IRRC, 2002). In 1979, IRRC launched the South Africa Review Service for which ‘company-specific reports as well as book-length studies on the South Africa debate’ were written (IRRC, 2002). By the end of the 1970s, IRRC had roughly tripled in size with close to 180 institutional subscribers (IRRC, 1982). IRRC subscribers were mostly universities, colleges, and schools (69 subscribers), as well as bank and trust companies (31 subscribers). Other subscribers included insurance companies (13 subscribers), investment firms (9 subscribers), other firms and associations (14 subscribers), foundations (14 subscribers), hospitals (two subscribers), pension funds (9 subscribers) and church groups (17 subscribers) (IRRC, 1982).

From scrutinising the few to observing the many (1981–1992)

In the 1980s, social issues remained a core focus of IRRC with South Africa apartheid and Northern Ireland religious discrimination issues. However, IRRC also progressively expanded the scope of its activities to environmental issues and corporate governance issues. In the early 1980s, following the Three Mile Island nuclear plant accident, anti-nuclear activism was on the rise and IRRC established an ‘Energy and Environment’ programme and from the mid-1980s, an environmental information service (IRRC, 2002).

During the same period, corporate governance issues really took off and IRRC was a pioneer on these issues (IRRC, 2002). James E. Heard, a former policy adviser to the US Department of Commerce (IRRC, 1982) and ‘a raging moderate’ as his roommate at Harvard described him, was in charge of corporate governance issues at IRRC (Borrus, 2002). In 1981, IRRC launched a Corporate Governance Service to inform on issues such as ‘executive compensation packages, antitakeover measures, and the election of directors’ (IRRC, 1982: 1) and ‘other issues that affect the value of corporate assets or the rights of shareholders’ (IRRC, 1985: 2). This service was complemented by a newsletter, the Corporate Governance Bulletin, in 1983. In 1984, IRRC started to provide ‘analysis of non-routine voting items at individual companies in the S&P 500 [Standard & Poor’s 500 Index] at least three weeks before the annual meetings, expanding the universe to 1000 in 1985’ (IRRC, 2002). Although at the beginning IRRC was focusing on specific corporations with problematic corporate governance issues in the United States, the scope of coverage was rapidly expanded to many corporations. As such, IRRC shifted from scrutinising the few to surveilling the many.

From the mid-1980s, several new PAs emerged, with a core focus on corporate governance. In 1984, Proxy Monitor Inc. was founded by William Eric Aiken, a renowned expert in corporate governance issues (BusinessWire, 1996). In 1985, Robert A.G. Monks set up Institutional Shareholder Services (ISS). Monks, the founder of ISS, is a leading figure in the US shareholder movement, a long-time advocate of corporate governance reforms against ‘corpocracy’.³ He has worked as a money manager and was head of the Labor department’s Pension and Welfare Benefits Administration under the Reagan administration, the same department that issued the Avon letter in 1988, which formally states that voting is part of the fiduciary obligations of pension funds (Starkman, 2006). During his brief time at the Department of Labor, he strongly encourage ‘pension managers to behave like ‘activist corporate citizens’’ (Trost, 1984). Marco Consulting Group (MCG), which also provides proxy voting services, was founded in 1988, but only for the benefit of Taft-Hartley funds (Marco Consulting Group (MCG), 2016). These PAs were mainly proponents of shareholder activism to counter anti-takeover practices and make management more accountable to shareholders. As expressed by one informant working for a PA, ‘it is all about empowering shareholders at all times’ (PA1, Interview 1).

The emergence of new PAs was not limited to the United States but rapidly became a global phenomenon, thereby significantly expanding the scope of corporations under scrutiny. In 1986, Pensions & Investment Research Consultants Ltd (PIRC) was formed by a group of public sector pensions in the United Kingdom with environmental and social concerns in mind, including South African issues (PIRC, 2016). In 1991, it launched the UK’s first corporate governance service (PIRC, 2020). Deminor, in Belgium (Deminor, 2016) started out in 1990, with the objective of protecting shareholders. And in the early 1990s, IRRC started its IRRC Global corporate governance services, thereby expanding its reach outside the United States:

Responding again to requests from subscribers, it [IRRC] started a Global Shareholder Service, which began by preparing reports on the rules and customs in the various foreign corporate governance markets, and which has expanded to provide research and analysis on more than 6000 company meetings in 62 countries. (IRRC History, 2002)

As expressed in this quote, IRRC scrutinised around 6000 companies worldwide, thereby placing most of the largest companies in the world in a field of visibility. Proxy Monitor and ISS, the two main competitors of IRRC in the United States, followed and provided, soon after, global coverage to service mostly US clients with investments abroad. The competition between ISS and IRRC also took another turn in 1991, when James Heard who was responsible for Corporate Governance Services at IRRC joined ISS at the request of Robert Monks (Borrus, 2002). At that time, IRRC had 47 staff and around 400 subscribers, including 79 pension funds and 121 investment managers and advisers as per its 1990 annual report (IRRC, 1991).

This expansion in the scope of companies analysed by PAs was also facilitated by the rise of new information technologies in the late 1980s and 1990s. PAs started to set up electronic platforms to provide their research and other survey reports easily to institutional investors through the Internet. Thus, in 1988, IRRC (1989) launched its ‘ProxyVoter’ software (available to clients from 1989) which is described as follows in the IRRC annual report:

[It] organizes the process of voting proxies by giving users an easy way to display their voting guidelines and to record how and why they voted on every issue at every company in their portfolios. . . . ProxyVoter provides immediate access to companies’ record dates, annual meeting dates and IRRC’s summary and analysis of every proxy ballot issue at 1500 companies that comprise more than 90 percent of the market capitalization of NYSE [New York Stock Exchange], Amex [American Stock Exchange] and Nasdaq [National Association of Securities Dealers Automated Quotations] listings. (p. 5)

The electronic platform set up by IRRC enables institutional investors to easily access information on shareholder proposals and the related research performed by IRRC on corporate governance issues but also on social issues. In addition, ‘Portfolio $creener’ was also made available on the platform in 1990, so that IRRC subscribers could screen more than 1700 companies over social and environmental issues (IRRC, 2002). Overall, these electronic platforms centralise in one place all the information on corporations across a broad scope of issues (corporate governance and social issues) and are accessible any time. As such, observations are centralised and hierarchised on these platforms which resemble Panopticons enabling investors to observe without being seen.

Normalising investors’ judgements through voting policies and voting recommendations (1993–2001)

In the 1990s, the development of information technology fuelled the market expansion of PAs and to some extent their influence on institutional investors. At the beginning, electronic platforms set by PAs were used to deliver information on a large scope of companies to many institutional investors. Progressively, PAs expanded their services beyond the provision of information as explained by ISS (2002a) on its website:

In 1993 ISS introduced ‘ProxyMaster’, a powerful software tool which allowed fiduciaries access to ISS’s renowned research and voting recommendations for both US and international shareholder meetings. Through ‘ProxyMaster’, clients could receive the proxy information they needed and with a useful desktop program, instruct ISS on how to execute their votes.

As explained in this quote, ISS ‘ProxyMaster’ includes new services enabling institutional investors to execute their votes but also to receive recommendations (in addition to research reports) on how to vote on different AGM resolutions. The same year, IRRC ‘inaugurated its SmartVoter software, which generates proxy voting decisions based on an institution’s own proxy voting guidelines’ (IRRC, 2002). In 1995, IRRC introduced the vote execution services and record-keeping under its new IRRC Agency Voting Service. This model was also followed by other PAs such as Proxy Monitor with its Global Proxy Service and Voting Agency Service (Proxy Monitor, 1999). As such, PAs’ electronic platforms became a one-stop voting service for institutional investors. They facilitated the diffusion of voting recommendations but also made it possible for investment managers to simply follow the voting recommendation provided by PAs, thereby enhancing disciplinary power on corporations and their executives.

As indicated by an informant working at a PA, the provision of voting recommendations was driven by institutional investors overwhelmed with information and research reports. Therefore, PAs started to develop recommendations but ‘needed a methodology, a voting policy’ (PA4, Interview 2). Two main models of voting recommendations emerged. The first model consists in developing a proxy voting decision based on the voting policy developed by the client (customised voting recommendations) as in the case of IRRC ‘SmartVoter’ software (IRRC, 2002). The client sets up its voting preferences and the PA operationalises these preferences into a voting decision. Since clients have different voting preferences, for the same resolutions, PAs will then issue different voting recommendations for each client. IRRC and other PAs still offer these types of customised recommendations.

The second model develops a voting recommendation based on PAs’ generic (or ‘in-house’) voting policy. For instance, before 2004, ISS was seeking input from ‘a relatively small circle of US-based client institutions recognised as corporate governance bellwethers’ to update its voting policy (ISS, 2006a). Then, ISS decided to seek input from a broader range of constituents by introducing an annual survey available to its clients but also to any other market participant (ISS, 2006a) as well as making publicly available its voting policy on its website in 2007 (ISS, 2006b). As explained by an informant working at a different PA, by sending its survey to ‘everybody individually’ including issuers and investors, ISS gathers the views of market participants, finds the middle ground and reflects ‘common practices’ (PA5, Interview 1). As such, the generic voting policies set by ISS but also other PAs aggregate views normalise judgement about what constitutes standard corporate governance practices. This normalised judgement is reinforced by the issuance of voting recommendations based on these generic voting policies since many institutional investors are likely to follow the same recommendations.

However, some PAs resisted providing generic recommendations. IRRC is ‘known for a neutral policy that avoids specific recommendations’ (Taub, 2005: 1) and has never issued generic voting recommendations as mentioned by one informant who worked at IRRC:

I think IRRC, they were trying to be a pure thing. They did not want to provide recommendations either way because they wanted to have the integrity of just providing research and not having a stick in the outcome. (PA5, Interview 1)

This indicates that IRRC was reluctant to make a binary assessment on whether a specific resolution shall be supported or voted against. It did not want to draw the line between the corporate governance practices that can be considered acceptable or ‘deviant’ in Foucault’s term. In contrast to other PAs such as ISS or Proxy Monitor, the practices set by IRRC had lower normalising effects. However, IRRC’s model did not become the dominant one.

Around the world, several PAs emerged during the 1990s. Corporate Governance International Pty Ltd in Australia (1993)⁴ was created by Sandy Easterbrook, a former corporate law firm partner and expert in corporate governance (GIA and Easterbrook, 2014). Proxinvest, in France (Proxinvest, 2016) was created in 1995 by Pierre-Henri Leroy, a strong advocate for shareholders’ rights. Manifest was established in 1995 in the United Kingdom (Manifest, 2016) to make things ‘clear’. Most of them followed the ISS model of providing both generic and customised voting recommendations except for the UK-based PA Manifest (newly renamed ‘Minerva’) which is still refusing to issue voting recommendations. During that time, US PAs also increased the number of corporations scrutinised and assessed through the development of alliances with shareholder organisations and other PAs around the world. Thus, on its 1996 website, IRRC mentioned contacts with ‘VEB (Netherlands), DSW (Germany), Centre-Info (Switzerland), Proxinvest (France), Deminor (Belgium), Aktiespararna and Redhe Financial Communications (Sweden), and IR Japan and IRC International (Japan) – to name just a few’ (IRRC, 1996). These collaborations between the US and non-US PAs enabled the diffusion of corporate governance norms and practices on a global scale. During that time, the competition between the US-based PAs also intensified. James E. Heard, who left IRRC in 1991 to join ISS, resigned from ISS in 1996 and became Proxy Monitor’s president in 1998 (ISS, 2006c).

Using calculative practices for the constant surveillance of corporations and their executives (2002–2006)

In 2002, ISS and IRRC introduced new services that rely heavily on calculative practices. In October 2002, IRRC in partnership with TrueCourse announced its intent to develop ‘a fact-based corporate governance scoring system’ (Bingham, 2002). A few months before in June, ISS launched its Corporate Governance Quotient (CGQ) to ‘assist institutional investors in evaluating the quality of corporate boards and the impact their governance practices may have on performance’ (ISS, 2002b). CGQ aggregates data, assesses, and compares individual corporations on 61 criteria for US issuers, respectively, 55 criteria for non-US issuers (ISS, 2003a). As explained in the ISS press release from 29 January 2003, ‘source data is derived from public disclosure documents, press releases, and corporate websites, then verified by ISS’s corporate governance analysts and input to the CGQ database in real-time’ (ISS, 2003b). Starting with a universe of 3000 companies in 2002, CGQ rapidly expanded its scope to cover 5000 companies in 2003, including 98 per cent of the US equity universe (ISS, 2003b).

This rapid expansion was the consequence of strong demand from institutional investors as explained by ISS CEO in 2003: ‘The scandals of the past 18 months have revealed systemic weaknesses in our system of corporate governance [. . .]. As a result, the demand from institutional investors for corporate governance information has increased exponentially’ (ISS, 2003b).

As indicated in this quote, corporate governance scandals in the early 2000s have boosted the demand for corporate governance ratings and other corporate governance information. The series of corporate scandals such as the Enron and Worldcom affairs gave new momentum to the accountability-creating agenda. In the United States, several regulations designed to promote ethical behaviour, transparency and accountability in corporate management were introduced. While the Sarbanes-Oxley Act (2002) mostly focused on companies, the 2003 Securities and Exchange Commission (SEC) rule on proxy voting disclosures targeted registered management companies, pension funds, mutual funds, and other funds that follow a passive investment strategy (e.g. exchange traded funds) to give them greater responsibility for monitoring corporate management. This rule includes requirements for implementing voting policies and disclosures on voting procedures and decisions (Securities and Exchange Commission (SEC), 2003) and triggered very rapid expansion in the PA industry in the United States (General Accountability Office (GAO), 2007).

For economic and operational reasons, many mutual funds needed the services provided by PAs to implement a voting policy, vote accordingly, and execute voting procedures for thousands of AGMs across the globe. The new rule was much more demanding than the previous ERISA law and other interpretive letters since the proof was required that appropriate steps had been taken to fulfil their obligations. While not being an explicit voting obligation, this regulation has been interpreted in practice as if mandatory as indicated by one informant working for a French institutional investor:

In my opinion, they [PAs] have emerged when the SEC has made several decisions, saying that voting was part of the fiduciary responsibilities of asset managers and asset owners, which has been interpreted by most actors as a mandatory voting obligation. (AMI1, Interview 1)

As explained in this quote, the strong development of the PA market is an unintended consequence of the SEC’s attempt to increase voting responsibilities of mutual funds. PAs saw their revenue and profitability quickly increase around that time. Thus, while Thompson Financial sold ISS in 2001 for $45 million,⁵ the transaction price reached $553 million when bought by RiskMetrics in November 2006.

In that context, new players emerged, such as Egan Jones in 2002 (US; affiliated with Egan-Jones Ratings Co., a credit rating agency, see Egan Jones, 2016), Proxy Governance Inc. (PGI) in 2004 (US; owned by FOLIOfn, a financial services company, see Proxy Governance, 2016), and GL founded in 2003 by Gregory Taxin (a former Goldman Sachs investment banker) and Kevin Cameron (an attorney) in response to Enron and other corporate collapses (Kerber, 2012). GL soon became the second-largest PA worldwide by ‘identifying business, legal, governance, and financial statement risks at public companies in time for investors to act upon them’ (Glass, Lewis & Co (GL), 2005: 1). GL developed specific calculative practices such as ‘The Monitor’ which provides ‘a critical review of the earnings quality of more than 4,000 U.S. public companies through the application of industry-specific benchmarking and analytical tools’ (GL, 2005: 2). Another topic became of key interest during that period – executive compensations. PAs started to assess and benchmark executive compensations. For instance, GL (2005) developed Pay-For-Performance as explained in its 2005 brochure:

Glass Lewis uses a proprietary pay-for-performance model that evaluates compensation of the top five executives at all U.S. companies, benchmarking the compensation of these executives against their performance. Glass Lewis uses this analysis to inform its recommendations on each of the compensation issues that arise on the ballot, as well as in the evaluation of the compensation committee’s performance. (p. 8)

This quote indicates that the compensations of high-ranked executives at US companies are compared with the corporate performance achieved and executives are then benchmarked against one another. As such, it is no longer corporations that are being ranked. Individuals are also being assessed, ranked, and ‘sanctioned’ if their compensations are not aligned with the performance achieved.

Gradually, in Europe as well, the fiduciary duty of institutional investors has been reinterpreted to encompass voting activities. The 2003 US regulatory initiative very soon inspired other regulators in Europe in a sort of mimicry. In 2003, France issued its financial security law, the Loi de Sécurité Financière (LSF), and required UCITS (Undertakings for Collective Investments in Transferable Securities) portfolio management companies to exercise voting rights, implement a voting policy, and report on how they had exercised voting rights over the past year (Observatoire de la Responsabilité Sociétale des Entreprises (ORSE), 2011). The PA market expanded globally during that period and new players emerged such as Shareholder Support (the Netherlands) in 2002 (Shareholder Support, 2016), Nordic Investor Services (Sweden) in 2002 (Nordic Investor Services, 2016), and Ivox (Germany; founded by investment fund association BVI, see ESMA, 2012) in 2005 (GL, 2015).

The market also became more concentrated. Proxy Monitor acquired ISS in 2001, with the new entity keeping the name ISS and James Heard becoming CEO of the newly formed entity (ISS, 2006c). Then, ISS rapidly expanded its business worldwide through external acquisitions. During the year 2005, it acquired Deminor Rating S.A. in May, ISS Proxy Australia in June, and the Investor Responsibility Research Center Inc. (IRRC) in July.⁶ IRRC had become a for-profit entity in 2001 but struggled financially to keep up with ISS (Taub, 2005). As explained by IRRC CEO at the time, Linda Crompton, ‘the market shift toward globalization, integration, and straight-through electronic vote processing has resulted in the need for technology enablement, local market expertise, and global scope’ (Taub, 2005: 1). As a result, significant investments in technology were needed to meet the demands of institutional investors and IRRC was financially constrained.

ISS was then taken over in 2006 by Risk Metrics, a company that was subsequently listed in 2008.⁷ GL was bought for USD40 million by Xinhua Holdings Ltd in 2006 before being sold to the Ontario Teachers’ Pension Plan for USD46 million.⁸ In 2006, GL acquired the Australian PA Corporate Governance International Pty Ltd, subsequently renamed CGI GL.⁹ The progressive concentration of the PA market on a global scale led to a highly oligopolistic industry. This situation raised concerns about the influence of the two largest PAs on voting, and the potential lack of diversity in the opinions provided to institutional investors. As a result of this oligopolistic situation, the normalisation effects on corporate governance issues are likely to be stronger.

Opening up the Panopticon (2007–present)

As from 2007, PAs started to attract public criticisms and several calls were made to enhance the transparency of the PA industry. Several events paved the way for that situation to happen in 2007. With the boom in the PA market, the rise of influential global PAs through mergers and acquisitions, and more votes being cast, PAs ‘appeared on the radar of listed companies’ directors’ as stated by an informant working for a French issuer association (ISA3, Interview 1). And issuers were not the only organisations turning their attention to PAs. In 2005, the NYSE set up a Proxy Working Group (consisting of institutional investors, issuers, etc.) to consider potential amendments to NYSE rule 452 applicable to brokers (New York Stock Exchange (NYSE), 2006). This rule allowed brokers a free vote (without investors’ instructions) in the case of resolutions considered as ‘routine’, and the NYSE wanted to reconsider whether uncontested director elections should be classified as ‘routine’. As reported in the Proxy Working Group report, ISS complained about this rule in 2003 (NYSE, 2006: 9).

Nevertheless, ultimately PAs found themselves on the receiving end of the criticism. The Proxy Working Group finally recommended that the NYSE should request an SEC investigation into the role of PAs. Shortly after, at the request of two members of Congress, the US Government Accountability Office (GAO) conducted such an investigation and issued its report in June 2007 (GAO, 2007; Romanek, 2007). Although it pointed out a few potential conflicts of interest, the report concluded that ISS’ influence was not necessarily particularly significant (GAO, 2007).

The 2007 GAO report did, however, trigger strong reactions from issuers’ associations, especially the US Chamber of Commerce (Ryan Jr, 2008) in an article entitled ‘GAO Study on Proxy Advisors Falls Short’. It argued that PAs ‘yield significant- not limited-influence’ and that ‘the influence and regulation of PAs is a significant matter that warrants a more thorough and robust study’ (Ryan Jr, 2008: 10). Later, the Chamber argued in a letter that ‘Risk Metrics [which owns ISS], while not a regulator, serves a quasi-governmental role by effectively setting national and international policy’ (Center for Capital Markets (CFCM), 2008: 4). As argued in this quote, ISS acts as a standard-setter of corporate governance practices therefore the US Chamber of Commerce supported increasing the transparency of PAs.

In July 2010, the SEC issued a concept release on the US proxy system (S7-14-10), which also included comments related to PAs (SEC, 2010). Ultimately, these concerns led regulators around the world (e.g. the United States, the European Union, Australia, and Canada) to increase the regulatory scrutiny on PAs. In March 2012, the ESMA issued a discussion paper (ESMA, 2012) on policy options to regulate PA services, which were not yet regulated at the pan-European level. The ESMA issued its final report in 2013. Favouring a self-governance approach to enhance transparency, this report (ESMA, 2013) recommended that the PA industry establish a Code of Conduct based on ESMA-suggested guidelines and principles. The Best Practice Principles (BPP) were issued in March 2014: the three principles set by the PA industry were driven by a concern for transparency (BPPG, 2014). In the United States, the debate is still ongoing. On 22 July 2020, the SEC issued new amendments to the proxy rules ‘to ensure that clients of proxy voting advice businesses have reasonable and timely access to more transparent, accurate and complete information on which to make voting decisions’ (SEC, 2020). These pressures to increase PAs transparency and open the Panopticon can be understood as attempts to limit the disciplinary effects of PA practices.

Discussion and conclusion

Overall, this article highlights that PAs have strongly contributed to the implementation of a network of techniques and procedures that discipline corporate executives. First, it shows that PAs introduced hierarchical observation of corporations and their executives. In the 1970s, IRRC mostly prepared research reports on specific social and political issues. These research reports were later prepared in relation to a few specific corporations. As such, the surveillance was punctual, limited to a few companies. Progressively the scope of surveillance expanded and became more systematic. New PAs emerged in the United States (e.g. ISS and Proxy Monitor) and PAs started to compete on the universe of corporations covered and analysed to attract more clients. The scope of topics covered expanded with the rise of corporate governance rooted in agency theory which supported an explicit disciplinary project (Roberts, 2001b). From analysing mostly non-routine resolutions (i.e. ad hoc shareholders proposals on social or political issues), PAs expanded their analysis to routine resolutions such as directors’ elections. Besides, the surveillance became worldwide with the US PAs analysing non-US companies and new PAs emerging around the world (e.g. Europe, Australia, and others). While the scope of analysis broadened, it also deepened, shifting from corporations to specific individuals managing these corporations to investigate issues of directors’ elections or CEO compensations. Consistent with Foucault (1977: 143), the ‘disciplinary space tends to be divided into as many sections as there are bodies or elements to be distributed’. Executives are individualised, separated from the collective management team to be analysed as a unique ‘case’. This finding echoes research arguing that the inner circle – the network of élite corporate executives – is fractured, leaving individuals more isolated (Benton, 2017; Mizruchi, 2013).

From systematic, the surveillance also became constant. Positioned by institutional investors and corporations, PAs enabled investors to scrutinise corporations and their executives. The development of electronic platforms (e.g. IRRC Proxy Voter) made it possible to have all the information gathered on all corporations and their executives in a single place, accessible at any time. As such, PAs’ electronic platforms resemble Panopticons (Foucault, 1977), enabling investors–clients to see all the corporations and their executives placed in a ‘field of visibility’ by PAs while not being seen by corporations and their executives. Later development of the electronic platforms as voting agencies enabled institutional investors to execute their votes, thereby rewarding or sanctioning good/bad corporations and executives.

Second, this article shows how PAs’ tools and services contributed to normalising judgements. PAs first provided research reports with background information and no explicit conclusions on whether investors should sanction or reward a specific corporation. Progressively, PAs’ services evolved to include a voting recommendation. Starting from customised voting recommendations based on the respective voting policy set up by each of their clients, some PAs like ISS and GL developed generic voting policies and generic voting recommendations based on ‘market preferences’. These generic voting policies became norms in corporate governance by reflecting the preferences of multiple stakeholders. Besides, by providing the same generic voting recommendations to many institutional investors, the norm is more likely to be enforced by investors sometimes accused of following ‘blindly’ PAs’ recommendations (e.g. Larcker et al., 2013).

The development of corporate governance ratings by PAs also contributed to normalising judgements. ISS Corporate Governance Quotient or IRRC Corporate Governance rating relies on many criteria to assess corporations’ practices but also hierarchises and ranks corporations. Differences are emphasised between corporations and incentives are created to reach the top of the ladder and avoid downgrades. Consistent with Foucault (1977: 183), ‘the perpetual penalty that traverses all appoints and supervises every instant in the disciplinary institutions compares, differentiates, hierarchizes, homogenizes, excludes. In short, it normalizes’. Corporate governance ratings normalise judgement about corporations. Similarly, CEO compensation benchmarks and rankings introduced by PAs normalise judgements about individuals. With the ratings being regularly updated, corporations and their executives become subject to an ‘uninterrupted calculated gaze’ (Foucault, 1977: 177).

Third, this article shows how AGMs have become a highly ritualised examination of a corporation and its executives. PAs update their generic voting policy in the months preceding the AGM, giving some hints to the executives on which corporate governance practices are likely to attract positive or negative voting recommendations. During that preparation, executives may try to follow PAs’ policies, anticipate PAs’ recommendations and ultimately self-discipline, consistent with Roberts et al.’s (2006: 283) observation that ‘[p]art of the peculiar power of disciplinary processes is that power works in advance of its exercise; as self-discipline it is realised in anticipation of the judgement of others’.

Then, the voting platform of PAs enables institutional investors to access research and voting recommendations, set up their voting decisions (either manually or automatically according to customised or generic voting recommendations provided by PAs), and last execute their voting decisions. PAs voting platforms enable a large proportion of institutional investors to take part in the examination process, thereby subjecting corporate executives to more intense scrutiny. PAs voting platforms also keep records of the voting results of all AGMs every year. As such, corporations and their executives are introduced ‘into the field of documentation’ (Foucault, 1977: 189). While AGMs often provided the opportunity to celebrate and glorify executives due to its ceremonial feature (e.g. Davison, 2004), the examination as facilitated by PAs’ services turns each individual into a ‘case’, an object of knowledge. ‘This turning of real lives into writing is no longer a procedure of heroization; it functions as a procedure of objectification and subjection’ (Foucault, 1977: 192). Rather than being a ‘memorable man’, a corporate executive is now a ‘calculable man’ (Foucault, 1977: 193), a ‘governable person’ (Miller and O’Leary, 1987).

Overall, this article contributes to the literature on corporate governance in multiple ways. First, it extends historical studies (Lai et al., 2019; Shah and Napier, 2019) of corporate governance by showing how PAs have contributed to developing structures that impose increasing disciplinary power on executives. Using a Foucauldian perspective, this study provides a different understanding of power, away from the sovereign view of power that underlies agency theory (Roberts et al., 2006). In this study, power is not something being held by actors but something that emerges from techniques and procedures. As such, this research shifts the debate away from whether shareholders hold more power than corporate executives (e.g. Fligstein, 2016; Gendron, 2018) by showing that power lies in the Panopticon-like type of structure implemented by PAs and used by institutional investors. As such, future research could pay further attention to the different technologies and services provided along the ‘voting chain’ to understand how they may support or prevent the imposition of disciplinary power. The rise of new types of investors such as hedge funds also provides valuable opportunities for future research to investigate how the technologies provided by PAs may be used in a different way by hedge funds and pension funds.

Second, this article extends prior research on the role and influence of PAs by providing insights on the historical emergence and development of PAs. While prior research has mostly focused on whether the voting recommendations of ISS and GL are followed to a great extent by investors (e.g. Ertimur et al., 2013; Hitz and Lehmann, 2017), this article takes a different perspective. It shows how PAs developed a broad range of services and progressively redefined their services to better meet their clients’ expectations, thereby contributing to serving the disciplinary approach that became dominant in corporate governance (Roberts, 2001b). Rather than focusing on a single type of service or technology, this study underscores the need to consider the whole range of technologies provided by PAs and how these technologies hierarchise observations, normalise judgement and examine.

This study also provides avenues for understanding the role of PAs in a more positive way. According to Foucault, disciplinary power can have positive effects, leading to the ‘the production of certain forms of subjectivity’ (Roberts et al., 2006: 281). While the current debates have often been quite critical of the PA’s role, PAs may have enabled a broader and more active engagement of shareholders in the governance of corporations and positively shaped executive subjectivity. By conducting interviews with corporate executives, further research could investigate how the broad range of services provided by PAs may shape executive subjectivity.

Footnotes

Appendix

Appendix 1.

Characteristics of interviewees.

No.	Organisation identifier	Category	Interviewee identifier	Date of interview	Face to face or phone?	Duration of interview (in minutes)
1	A1	Academic	1	28.01.2014	Face to face	61
2	IA1	Investor association	1	01.04.2014 (joint interview)	Face to face	70
3	IA1	Investor association	2	01.04.2014 (joint interview)	Face to face	70
4	IA2	Investor association	1	17.04.2014	Phone	46
5	IA3	Investor association	1	23.04.2014	Face-to-face	54
6	IA4	Investor association	1	05.09.2014	Phone	24
7	AMI1	Asset management institution	1	24.02.2014	Face to face	68
8	AMI2	Asset management institution	1	24.03.2015	Face to face	35
9	ISA1	Issuer association	1	20.03.2014	Face to face	147
10	ISA2	Issuer association	1	16.04.2014	Phone	65
11	ISA3	Issuer association	1	04.04.2014	Face to face	62
12	ISF1	Issuer firm	1	24.07.2014	Face to face	106
13	PA1	Proxy advisor	1	11.12.2013	Face to face	178
14	PA2	Proxy advisor	1	22.01.2014	Face to face	81
15	PA3	Proxy advisor	1	30.01.2014	Phone	55
16	PA4	Proxy advisor	1	27.03.2014	Face to face	61
17	PA4	Proxy advisor	1	23.04.2014	Face to face	115
18	PA5	Proxy advisor	1	26.03.2015 (joint interview)	Face to face	130
19	PA5	Proxy advisor	2	26.03.2015 (joint interview)	Face to face	130

Acknowledgements

This paper is based on the first chapter of my dissertation at the ESSEC Business School. I am greatly indebted to my co-supervisor, Marie-Laure Salles-Djelic and Chrystelle Richard for their continuous support and valuable guidance. I would also like to thank Patricia Charléty and Afshin Mehrpouya for providing useful contacts for my data collection. I also benefitted from advice and comments made by Bruce Carruthers, Timothy Fogarty, Matthew Hall, Yves Gendron, Kalle Kraus, Bernard Leca, Sabine Montagne, Nicolas Mottis, Hélène Rainelli-Weiss, Leona Wiegmann, three anonymous reviewers and participants to the brown bag seminars at ESSEC, to the European Accounting Association (EAA) Conference in Glasgow, to the Association Francophone de Comptabilité (AFC) conference at Toulouse Business School, to the Conference Internationale de Gouvernance (CIG) at Université Laval and to the Deloitte – J. Michael Cook 2015 Doctoral Consortium.

Funding

The author would like to thank the Research Center of ESSEC Business School (CERESSEC) for its financial support.

ORCID iD

Damien Lambert

Notes

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