New CPA Report Examines the Power of Proxy Advisory Firms

October 4, 2018

Press Release from Capitol Policy Analytics: 

Research adds to pressure on Proxy Advisors following the recent withdrawal of ‘No-Action’ letters

SEC to explore the issue in greater detail in November roundtable

Financial return is the number one priority for retail investors saving for retirement or a home, but their priorities are less important to some fund managers and financial advisers, than various political exigencies. A recent study published in Regulation magazine written by Capital Policy Analytics president Ike Brannon and senior consultant Jared Whitley suggests the role (and goals) of proxy advisory firms can conflict with the objectives of investors, and that additional steps are needed to limit their power, including ending the requirement that fund managers vote their proxies.

“After a big debate on fiduciary rules predicated on the fact that sacrificing even small returns can have large long-term consequences, that reality can be shunted aside when we discuss proxy advisory firms and the increasing predilection of managers–often nudged by proxy advisory firms with their own agenda –to consider issues other than returns,” said Ike Brannon, the study’s lead author. “I don’t think that investors realize that this development is not necessarily in their best interest.”

Investment managers are required by the Securities and Exchange Commission (SEC) to submit proxy votes for all the companies in their funds. Because of the large number of companies that entails, most investors rely on a proxy advisory firm for guidance in voting on shareholder proposals. But these firms operate with an opacity that makes it difficult for their clients to discern the truth. Proxies have increasingly forced political activism into shareholder proposals, circumventing legislation or regulatory activities, to accomplish their own ends.

The report comes at a critical juncture. Last week the SEC announced that it would revoke guidance that had cemented proxy advisory firms’ position as stewards of corporate governance. The so called ‘no-action’ letters allowed asset managers and other investors to circumnavigate potential issues over conflicts of interests within their business by outsourcing their voting decisions to proxy advisories. The decision to withdraw the letters comes ahead of a November roundtable on the subject, where the Commission is expected to explore the issue in greater detail.

“It is perfectly fine for people to choose to do ethical investing with their own money,” concluded Jared Whitley, the study’s co-author. “But proxy advisory firms can often nudge firms to behave this way with other people’s money. It is a troubling situation that deserves more scrutiny.”

Because social activism by proxy advisory firms has been proven to reduce returns for investors, both Congress and the SEC have expressed the need to rein them in via legislation or regulation. The study, “Corporate Governance Oversight and Proxy Advisory Firms,” is available here.




Capital Policy Analytics is a consultancy that provides economic analysis to businesses both in the U.S. and abroad regarding how government policies affect markets and the broader economy. Ike Brannon, Ph.D., serves as president while Jared Whitley, MBA, is a senior consultant.

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