June 12, 2018
Congress isn’t the only one paying attention to the proxy advisory firms lately. Last month, Tim Doyle of the American Council for Capital Formation penned a post for Harvard Law School’s blog on Corporate Governance and Financial Regulation summarizing a recent report he wrote on the conflicted role of the proxy advisory firms. His core finding: Proxy advisory firms are the new “shadow regulators,” and their decisions carry implications for the operations and disclosure requirements of hundreds of companies.
As ACCF’s Doyle notes, the financial and investment landscape presents a number of complications and challenges for even the most seasoned professional, to say nothing of the challenges presented to an average investor. In order to operate in this environment, all investors rely on information from data and analytics providers and advisory services to help make decisions. The proxy advisory firms, in particular, have thereby established a great deal of power and influence over the behavior and decisions of investors (if you’re not familiar with how proxy firms operate, see What is a Proxy Advisory Firm? Who Do These Firms Actually Work For?).
Notably, Doyle’s report found that proxy advisors ISS and Glass Lewis have amassed considerable power and influence, with institutions voting in line with their recommendations in more than 80 percent of cases. Further, the very recommendations issued remain opaque – the proxy firms provide little to no transparency regarding how they develop these recommendations. They also regularly make changes to their policies, making it hard for firms, particularly small businesses with limited resources, to keep up. This is to say nothing of the fact that ISS and Glass Lewis wield this influence, yet are subject to virtually no oversight or regulation despite the fact that their behaviors and recommendations impact millions of American investors.
One area of particular concern the ACCF report highlights is the level of robo-voting in line with proxy advisor recommendations. As Doyle explains:
“There are institutions, particularly in the quant and hedge fund space, that automatically and without evaluation rely on proxy firms’ recommendations. In addition to potentially breaching fiduciary duty, this extends the power and impact of ISS and Glass Lewis policy recommendations and decreases the ability of companies to advocate for themselves or their businesses in the face of an adverse recommendation.”
This power not only brings to question how proxy advisors are being held accountable, but how the assets of everyday investors are being put at risk by funds simply voting in line with recommendations made by proxy advisors, and with little knowledge of the resolutions themselves.
Doyle also presented the findings of his report at a recent event hosted by the Savings & Retirement Foundation, which featured a keynote address by SEC Commissioner Mike Piwowar. Following Commissioner Piwowar’s address, which examined the relationship between the rise of Environmental, Social, and Governance (ESG) investing and the decline of the Main Street investor, Doyle highlighted the fact that the proxy advisory firms have taken increasingly activist stances on social, political, and environmental issues, regardless of their actual impact on company performance. This activity begs the question: Are proxy advisor firms really looking out for Main Street investors?
Read ACCF’s full report, The Conflicted Role of Proxy Advisors, here.