November 20, 2018
In advance of last week’s Securities and Exchange Commission (SEC) roundtable on the proxy process, Timothy M. Doyle, Vice President of Policy and General Counsel for the American Council for Capital Formation (ACCF) submitted two comment letters to the Commission. The letters refer to some of the main topics that were addressed at the roundtable, including robo-voting, the shareholder proposal process, and the role of proxy advisory firms.
At the base of Doyle’s comments are recently produced research on the issue of proxy advisors and their ever-growing influences on the proxy process. The first of ACCF’s reports, “The Conflicted Role of Proxy Advisors” addresses concerns with proxy advisors’ increasing influence, and the weight that their analysis, recommendations, and consulting services hold, specifically when it comes to proxy voting. In Doyle’s letter from October, he highlights the need for the SEC to support congressional efforts for proxy advisory firm oversight, to demand transparency on proxy advisory recommendations, and to require proxy advisory firms to disclose unaudited and incomplete data.
The most recent ACCF letter uses two additional reports to bring special attention to proxy voting mechanics, specifically robo-voting, and the influence of proxy advisor firms. The first report, “Are Proxy Advisors Really A Problem?” was led by Frank Placenti, corporate governance expert with Squire Patton Boggs, and found that proxy advisory firms have numerous errors in their recommendations and often provide little to no time for companies to respond to errors. This has caused serious implications for investors as proxy advisors have not only been providing factually and analytically flawed recommendations, but also leave little time for companies to set the record straight. This results in thousands of votes being influenced by inaccurate recommendations.
The most recent report, “The Realities of Robo-Voting,” further explains the influence of these recommendations and the troubling practice of robo-voting. Of note, the report finds “hundreds of firms representing trillions of assets under management are voting their shares in line with proxy advisors’ recommendations,” causing Mr. Doyle to request that federal regulators focus on the “fiduciary duty and genuine reform investors deserve.” The report goes a step further to address the more specific consequences, especially for asset managers that do not have in house teams to analyze the myriad of proposal put forward each year, leaving them extremely reliant on proxy advisory firms’ recommendations due to lack of resources. While both letters praise and support the SEC for its efforts thus far, Mr. Doyle asks for more change to be brought to the industry.
When outlining his recommendations, Mr. Doyle highlighted a plethora of issues that ACCF has expressed concern over.
Regarding the issue of robo-voting:
“The practice of robo-voting can have lasting implications for capital allocation decisions and has resulted in proxy advisors playing the role of quasi-regulator, whereby boards feel compelled to make decisions in line with their policies due to their impact on voting. It is a dangerous fact that in such effectively functioning capital markets, proxy advisory firms remain unregulated, despite representing trillions of assets at the annual shareholder meetings of U.S. corporations.”
On the outsized influence of proxy advisor firms:
“…these powerful votes can add up to create lasting implications for corporate policy, profits, and disclosures. Despite this outsized influence, ISS and Glass Lewis provide little-to-no transparency as to what truly impacts their proxy voting guidelines. In fact, there is little systematic oversight of the proxy firm’s research processes, interactions with companies, and communications with investors. This dynamic, while giving increased power to proxy advisors, also decreases the ability of companies to advocate for themselves or their businesses in the face of an adverse recommendation. It also inevitably places undue pressure on smaller companies, who must bear the burden of meeting the constantly evolving requirements of the proxy advisors that wield heavy influence over their shareholders.”
On the ever-growing lack of transparency and closed-door operations of these firms:
“Another issue slated to be discussed at the Roundtable is whether there are conflicts of interest in proxy advisors’ services, including with respect to related consulting services provided by these firms. As ACCF notes in its May 2018 report, ISS provides consulting through its Governance Advisory Services — the details of which are not clearly defined on its website — and has drawn criticism for attempting to simultaneously rate a company and sell consulting services to companies seeking to improve their ratings. This consulting role remains generally unknown to the public, and potential conflicts of interest are not stated on ISS’s website, which carefully outlines the firm’s influence as a proxy advisor.”
We thank ACCF for submitting these letters which offer compelling evidence and recommendations for the Commission. All of the issues brought forth by ACCF were discussed in detail at last week’s roundtable. We hope the SEC will consider ACCF’s comments as they decide what actions to take following their roundtable on the proxy process.