April 10, 2019
A study recently published by Spectrem Group quantifies how retail investors feel about proxy advisory firms, revealing the wide disconnect between investors’ desires and proxy advisors’ practices. The survey concludes that “retail shareholders are too often being used as a poster child by institutional intermediaries to support practices in shareholder voting that retail investors do not support.”
Exile of Main Street: Providing a Voice to Retail Investors on the Proxy Advisory Industry is the first – and currently only – comprehensive analysis of shareholder views of proxy-advisory firms. The study was jointly written by Spectrem Group, a wealth management research firm, and J.W. Verret, a professor at George Mason University and member of the Security and Exchange Commission’s Investor Advisory Committee. It surveyed 5,159 Americans who have at least $10,000 of assets held in various types of accounts. Based on the survey results, the writers establish two broad conclusions: 1) retail investors have very little knowledge about proxy advisory firms; and 2) proxy advisory firms do not have investors’ best interests at heart.
The proxy advisory system is arcane and confusing – but the more retail investors learn, the more they support regulation.
The survey found that there is little knowledge of the proxy advisory system among everyday investors. 50 percent of retail investors surveyed knew nothing about the proxy advisory industry prior to the survey. But as they became more familiar with the issue, they were more likely to support increased regulation:
- Pre-survey, 64 percent of investors supported increased SEC oversight
- Post-survey, 85 percent of investors supported increased SEC oversight
- Of those familiar with proxy advisors, 98 percent support increased SEC oversight
- 76 percent of retail investors increased their level of support for SEC oversight after learning about proxy advisory firms
This lack of knowledge about the system directly benefits proxy advisors, as the more retail investors learn about them, the more likely they are to support increased regulation. In the words of coauthor J.W. Verret:
While proxy advisory firms occupy a relatively obscure and arcane part of the corporate governance universe, these results suggest that there is a baseline of concern about them among retail investors, which increases significantly as they learn more about the industry.
Proxy advisors’ focus on political and social activism, rather than maximizing returns, is out of sync with investors’ priorities.
Retail investors support increased regulation of proxy advisory firms for good reason, considering that priorities of proxy advisory firms and retail investors frequently diverge. According to the survey, investors view value maximization as most important:
- 91 percent of investors prefer maximizing returns over political and social objectives
The survey found that the vast majority of retail investors prioritize investment returns over political and social objectives. But evidence shows that proxy advisory firms are increasingly prioritizing politically-charged shareholder resolutions, even though such proposals have been proven to provide no clear value to returns, and even impart significant costs and burdens on targeted companies.
Important figures in the corporate governance world have been taking notice of this divergence. Speaking at a conference last month, remarks Commissioner Hester Peirce reminded institutional investors of their duty to maximize shareholder returns, and warned them about being sidetracked by political and social considerations.
What specific aspects of the proxy advisory system are most concerning to retail investors?
Survey respondents broadly supported reforming the proxy advisory system and identified specific issues that concerned them the most:
- 79 percent of investors support action to address robo-voting
- 95 percent of retail investors want to put an end to conflicts of interest
- 86 percent of retail investors want the SEC to increase proxy advisory transparency
It’s no coincidence that these issues look familiar: academics, trade groups, businesses and individual investors have been expressing concerns over these problems for months in comments to the Securities and Exchange Commission on the proxy process. Indeed, this research validates the core structural problems the Main Street Investors Coalition has identified within the proxy advisory system and the need for greater oversight.
Because investors lack knowledge about the system, proxy advisors are able to operate free from major scrutiny, allowing fundamental problems become further entrenched as they increasingly ignore their fiduciary duty. This self-perpetuating cycle is compounded by the absence of retail investors in the proxy process.
This means that it falls on the government to take action. This timely study follows recent statements by Commissioners Hester Peirce and Elad Roisman and two Senate hearings, all of which indicate that proxy reform is moving forward.
Until recently, proxy advisory firms have been in a position to take advantage of the lack of public knowledge surrounding their voting recommendation practices. But proof that retail investors support reform, combined with increasing scrutiny from Congress and the Securities and Exchange Commission, indicate that time is coming to an end.