November 13, 2018
With only a few days before the U.S. Securities and Exchange Commission’s (SEC) roundtable on issues with the proxy process, the 60 Plus Association has released a new report detailing how common practices by proxy advisory firms are harming retirement savings.
The report, Consequences of Proxy Advisors on Senior Investments, explains why blind reliance on proxy advisors is problematic for individuals who rely on investments and pensions for retirements. Enabled by a complete lack of transparency in the proxy process, Institutional Shareholder Services (ISS) and Glass Lewis, who together control 97 percent of the proxy advisory market, have routinely provided recommendations marred by shoddy analysis and mixed-up priorities. This is a problem because shareholders blindly rely on proxy advisor recommendations, ostensibly confident that the proxy advisors will uphold their fiduciary duties – which they frequently fail to do.
Instead of seeking to maximize returns first and foremost, proxy advisors oftentimes prioritize proposals that have little to do with value maximization:
According to its own guidance, ISS, for instance, will “generally vote for resolutions requesting that a company disclose information on the financial, physical, or regulatory risks it faces related to climate change on its operations and investments or on how the company identifies, measures, and manages such risks.” Moreover, so far in 2018, ISS has supported approximately 92.7% of shareholder resolutions requesting the creation of political or lobbying reports, without any evidence that these shareholder proposals are linked to the creation or protection of shareholder value.
Investment fund and pension managers rely on these recommendations on how to vote on proposals – which in turn shape the health of millions of Americans’ retirement funds.
But it’s not just proxy advisors’ commitment proposals that have little to do with returns that threaten retirement funds. Recent evidence suggests that proxy advisors often fail to do their research on risks to governance, frequently giving recommendations that end up destroying shareholder value:
A review of ISS and Glass Lewis voting recommendations on proposals at several companies shows numerous failures to identify emerging corporate governance issues that resulted in consequential destruction of shareholder value. If these advisors were doing their job and meeting their goals of managing governance risk, they should have alerted investors to what was coming, and protected the value of investments for all investors. Instead, their cursory analysis and rigid recommendations have demonstrated a lack of attentiveness and resulted in poor recommendations which have destroyed value and impacted the value of holdings for all investors – both institutional and individual.
For example, both ISS and Glass Lewis recommended supporting the re-election of all Board members at the 2008 annual general meeting of Lehman Brothers. Six months later, the firm collapsed in the biggest bankruptcy in U.S. history.
With this report, 60 Plus has added its voice to the cacophony calling for reform, joining a host of recently released reports from other organizations providing mounting evidence that the proxy advisory system is in desperate need of reform. In the past month alone, two reports from the American Council for Capital Formation quantify a few key issues in the proxy process. One found that a large group of asset managers have historically voted automatically with ISS’s recommendations. The other report explains why this is alarming: this automatic or robo-voting occurs despite widespread analytical and factual errors in proxy advisor recommendations.
Earlier this year, evidence from the U.S. Chamber of Commerce, the Manhattan Institute, the American Council for Capital Formation, and Capital Policy Analytics detailed numerous other issues with the proxy process. The Coalition is hopeful that this large body of evidence will help sustain the momentum within the SEC and Congress to rein in proxy advisory firms and restore retail investors’ voices.