June 14, 2018
When it comes to corporate governance, institutional investors have found ways to dominate the debates over what is – and isn’t – in the best interest of any given company’s long-term health. In 2017, institutional investors utilized 91 percent of their share voting power, while retail investors used only 29 percent of theirs, according to ProxyPulse.
Why such a big difference? In short, proxy advisory firms have made voting one’s shares on matters of corporate governance extremely easy for large institutional investors and asset managers on Wall Street. Institutional investors can access plenty of analysis from proxy advisors, who will also automate voting decisions for their big Wall Street clients, making the whole process very easy. Yet similar services are rarely available to Main Street investors, who often find voting their shares to be difficult, time consuming, and ultimately not worth the expense of time and resources.
Here at the Main Street Investors Coalition, we view this as a problem that can be easily resolved.
The American Business Conference (ABC) recently petitioned the Securities and Exchange Commission (SEC) to make shareholder voting easier for retail investors. In their proposal to the SEC, the ABC suggested making Advanced Voting Instructions (AVI) systems available to retail investors. “AVI would allow individual investors to register voting preferences with their broker for every stock they own,” wrote ABC.
The ABC cited the research of Professor Jill Fisch, an expert on corporate governance at the University of Pennsylvania, who wrote in a 2017 article for the Minnesota Law Review that “Recent regulatory changes and the rise of shareholder activism have made shareholder voting power increasingly important.” Thus, she concludes, retail investors must be given greater power to vote their shares. Prof. Fisch highlights how retail shareholder votes made all the difference in a tense 2015 proxy contest at chemical company DuPont, in which their votes saved the company from a hostile takeover.
Making an option like AVI available through brokers would make voting their shares on corporate governance much easier for retail investors. We would like to see this recommendation taken a step further, and make similar capabilities available to retail investors who own shares through mutual funds and index funds; currently, the voting power attached to these shares are given to the fund managers, whose voting preferences don’t necessarily reflect those of their millions of retail investing clients.
Meanwhile, Silicon Valley is also thinking up innovative potential solutions. A new startup called SAY aims to make shareholder voting easily accomplished through a mobile app, which ran a test vote during Tesla’s heated proxy vote over whether Elon Musk should be allowed to chair the company’s board. The app’s inventor, Jeff Cruttenden, told Forbes that his mission is to create “an opportunity for investors to speak as owners to companies… you have 100 million plus Americans that are investors that aren’t effectively speaking like owners.”
Proxy firms, of course, don’t want these solutions to become available. They make too much money by offering extensive services to big players on Wall Street, who could also potentially use inexpensive or free voting tools that become available to retail investors.
But on top of all that, proxy firms also have legion conflicts of interest, and are resisting regulation that would require these firms to be transparent about such issues, despite bipartisan pressure. A recent report from the American Council for Capital Formation highlighted proxy firms’ inability to offer sound advice to investors and the lack of transparency in their decision-making processes. The debate over whether they are acting in the best interests of all shareholders is not new, and overdue for a resolution.
In 2007, the US Government Accountability Office issued a report stating that proxy advisory firms are conflicted because they both tell shareholders how to vote and provide consulting services to public companies. Therefore, proxy firms are incentivized to tell shareholders to vote in ways that would cause a company to hire the same firms to do consulting projects. In a 2013 study reviewing extensive voting data, Columbia University’s Prof. Tao Li concluded that greater competition in the proxy advisory industry – which is dominated by just two companies, Glass Lewis and Institutional Shareholder Services (ISS) – would alleviate some conflicts. Law faculty from the University of Oxford in the UK have also chimed in, warning of similar problems for European markets.
Years later, the same firms still dominate, and are expanding their offerings to include voting recommendations on environmental, social and political issues. ISS recently released a report on climate activism for investors, outlining 10 ways they can “decarbonize” their portfolios with the aid of various services from the proxy advisor. Inherent in this report’s claims is the assumption that “decarbonization” is something all investors ought to seek in their portfolios. But new research has shown that climate resolutions offer no beneficial gain for investors. Instead, these resolutions create costs for companies, harming their overall performance, which is not in the interest of shareholders.
Clearly, ISS is hawking services that aren’t doing Main Street investors much good. The proxy advisory firms aren’t advocating for environmental and social investing because such strategies are good for investors. They do it because it’s good for their own margins, and aligns with the political interests of their institutional investor clients.
Main Street investors have had enough of the nonsense from proxy firms. They give major voting advantages to Wall Street investors, hide their conflicts of interest, and push services that promote abusing the shareholder resolution process for political ends that have no clear positive impact on corporate performance. On Main Street, these combined losses are doing real damage to 401(k) accounts, and retail investors are struggling to make their voices heard in boardrooms. It’s time for a long overdue change. We hope solutions like AVI and SAY can prove successful and give Main Street their voices back in matters of corporate governance.