Proxy Advisory Firms are No Fair Referees

October 5, 2018

While the proxy advisory firms would have you think they are neutral referees in the proxy advisory game, a new report seeks to differ.

This new report from Capital Policy Analytics adds to the voices questioning the current proxy advisory system, particularly its current structure and lack of proper oversight mechanisms. The paper looks at three core issues, including:

  1. The lack of accountability and transparency into the proxy advisory firms’ methodologies;
  2. Fact that they’re are viewed as neutral arbiters, much like a sports referee, when in fact they are for-profit enterprises; and,
  3. The more or less blind allegiance with which many investors follow the proxy advisory firms’ recommendations (“robo voting”).

A report from the American Council on Capital Formation also raised issues about the inherent conflicts of interest and lack of transparency in the current proxy advisory system and the influence they have on corporate and shareholder voting behavior. The tension created by all of the above has been exacerbated by the fact that firms are required to vote, which has only amplified the power and influence of the proxy advisory firms. Right now, the proxy advisory firms behave more like referees that have waged a bet on the game they’re calling.

The lack of accountability and transparency means investors can’t really trust the information they’re getting or the process by which those recommendations were made. The latter, the paper further notes, is particularly problematic when you think about the fact that proxy advisory firms have missed major issues at companies in recent years, issuing a recommendation to maintain the leadership and board structure and composition at Wells Fargo mere months before the fake customer accounts issue was uncovered. How can investors be sure the proxy advisory firms are conducting proper due diligence when they don’t know what is being assessed or how?

Shareholder rights advocates are placing new pressure on the firms, and regulators, to answer just that question.

The SEC has taken note and begun to take action, rescinding the staff letters that encouraged reliance on proxy advisory firm recommendations last month as a crucial first step. This new report from Capital Policy Analytics is another clear indicator of a need for change.  As the SEC prepares for a roundtable on November 15 to listen to investor, issuer and market participant views about the proxy process, it is critical these types of concerns are getting attention so Main Street investors can be protected. To submit your own comments to the SEC, visit the roundtable webpage here.

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