March 19, 2018
A proxy advisory firm helps institutional investors to vote their shares at shareholder meetings. These votes are called “proxy votes” because the shareholder usually does not attend the meeting and instead sends instructions for a third party to vote shares in accordance with the instructions given on the voting card.
Because institutional investors have a wide variety of holdings, the specific risks and issues they must assess vary. These institutional investors don’t always have the time or resources to understand the agendas, thoroughly research and review the different shareholder proposals or even to carry out certain votes. For this reason, proxy advisory firms like Glass Lewis and Institutional Shareholder Services (ISS) emerged to serve shareholders.
The services they provide include agenda assessment, research and recommendations on how to vote on shareholder proposals at publicly traded companies, among other offerings. Their stated purpose is essentially to uncover risks to enable institutional investors to make sound voting decisions in the best interests of their investors.
Their role has grown as the level of engagement around shareholder proposals has increased in recent years. In order to truly behave as fiduciaries, pension funds and institutional investors need to evaluate a lot of information in order to make voting and engagement decisions. While this process was once confined to a “proxy season,” the period of the year during which most companies file proxy statements that provide information about relevant shareholder votes with the Securities and Exchange Commission and hold their annual shareholder meetings, that is no longer the case. Companies file and move on various shareholder proposals throughout the year, meaning that institutional investors must be informed about and ready to vote on more nuanced issues on an ongoing basis. Proxy advisory firms, thereby, have become an increasingly utilized tool by these institutional investors because they don’t always have the resources in-house to handle the appropriate diligence around each proposal.
While more information can be a good thing, in this case, the additional information proxy advisory firms provide isn’t always conveyed with the best interests of main street investors in mind. Though these firms say that they put the interests of their clients first, there is a lack of clarity around who that client is as the roles of these firms have expanded to include different clients with disparate interests. According to the GAO’s 2016 report Corporate Shareholder Meetings: Proxy Advisory Firms’ Role in Voting and Corporate Governance Practices, “a conflict of interest for a proxy advisory firm could arise if it provided both proxy voting recommendations to institutional investors and consulting services to companies on the same matter.” For example, a proxy advisory firm can make recommendations to an institutional investor on a shareholder proposal around executive pay while also being paid by that company to analyze its executive compensation policies. The fact that these companies remain largely unregulated leads to biased recommendations that overlook what is truly in the best interests of the shareholders. In fact, Robert Daines, a Law Professor at the Rock Centre for Governance at Stanford University in California, indicated that there was no evidence that advice from proxy advisory firms helps shareholders. Main street investors must act to ensure their best interests are protected.