October 30, 2018
Yesterday, a new report from the American Council on Capital Formation (ACCF) dispelled a key claim often repeated by Institutional Shareholder Services (ISS) and its allies in their phony campaign to protect themselves from much needed reforms to the proxy process. According to ISS, the Main Street Investors Coalition and others are attempting to limit shareholder’s access to high quality and independent information by supporting the passage of H.R. 4015, the “Corporate Governance Reform and Transparency Act of 2017.”
According to the “What People are Saying” section of the ISS’s “protect shareholders” website, New York City Comptroller Tom Dinapoli, whose political agenda is aided by proxy advisory firms believes:
“Such a requirement would also delay investors’ access to research in the already constricted time frame available to consider ballot issues and develop independent voting decisions in an informed fashion.”
While the vaguely named Americans for Financial Reform claims:
“H.R. 4015 is a naked effort by powerful corporate interests to cripple the ability of independent advisory services that empower shareholders to have a stronger voice in corporate governance.”
However, the data in today’s report paints a drastically different picture of the analysis conducted by proxy advisory firms. This report highlights the findings of a review of “supplemental proxy filings”, which companies can submit to the U.S. Securities and Exchange Commission (SEC) if they believe a proxy advisory firm committed an error in their recommendation. This report looked at filings during the 2016, 2017, and partial 2018 proxy seasons and uncovered 107 “supplemental proxy filings” from 94 different companies. The filings cited 139 significant problems, including 90 factual or analytical errors in the recommendations. The report also confirms the widespread use of “robo-voting” whereby shareholders use an automatic process to vote in line with the recommendations of proxy advisory firms shortly after these recommendations are issued.
Companies assume additional liability when they file supplemental proxy (because they are correcting the record and must be absolutely sure of their statements). Therefore, these filings likely represent an accurate picture of errors committed by proxy advisory firms. It is also likely that the filings only represent the tip of the iceberg when it comes to proxy advisory firm errors because some companies may not have the time or resources to submit a filing to every incorrect recommendation. Additionally, the widespread use of robo-voting means that companies are less likely to significantly impact the vote count on a proposal by submitting a supplemental filing because a significant portion of the vote has been decided by the time the company files.
The combination of errors and “robo-voting” show that many institutional investors are not making “independent” and “informed” voting decisions because of the recommendations of proxy advisory firms. Instead, these investors are completely outsourcing their voting responsibilities to proxy advisory firms that are often not getting the facts underlying their recommendations correct.
This is why the Main Street Investors Coalition believes that fundamental reforms are needed in the proxy process, including greater oversight over proxy advisory firms. The Main Street Investors Coalition is not attempting to prevent investors from receiving outside research to inform their votes. Instead, the Coalition wants to ensure that the information underlying the recommendation is actually correct. The best way to do this is to allow companies to review the recommendations ahead of time, considering that they have a direct interest in fixing any mistakes. Ultimately, reforms to this process will improve corporate governance of public companies and the attractiveness of public markets, which is needed to ensure that retail investors share in the wealth.