August 16, 2018
This week, Rite Aid and Albertsons decided not to go ahead with a proposed merger due to opposition from proxy advisory firms. While arguments could certainly be made for and against this merger, this decision by these two companies makes clear the “outsize role that two advisory firms increasingly play in dictating shareholder interests,” according to the latest from The Wall Street Journal’s editorial board.
MSIC has highlighted the harmful levels of influence of these advisory firms possess before, but it’s worth repeating that Glass Lewis and ISS control 97 percent of the proxy advisory market, giving them substantial influence and encouraging herd voting among investors. That much influence for two firms alone should be concerning to average investors, but when coupled with the fact that they are under no obligation to show they are acting in the best interests of shareholders it becomes really alarming.
Institutional investors are allowed to rely on proxy advisors’ advice to fulfill their fiduciary obligations, but these third-party proxy advisory firms are under no obligation to demonstrate that their recommendations are in the best interest of shareholders, eliminating any guarantee of protection the Securities and Exchange Commission (SEC) thinks it is affording individual investors by working with those institutional investors on which the SEC has imposed a fiduciary obligation. In the case of Rite Aid and Albertsons, Glass Lewis issued its recommendation despite a clear conflict of interest – Alberta Investment Management Corporation is one of the 10 largest shareholders in Rite Aid and also owns a portion of Glass Lewis.
The lack of transparency around the behavior of the proxy advisory firms also hides inherent conflicts of interest in their businesses. As a recent report from the American Council on Capital Formation notes, these firms offer both ratings and consulting services to improve those ratings. The nature of this conflict of interest has been explicitly prohibited in other financial industries, but it remains unchecked in the proxy advisory process.
As the Wall Street Journal piece demonstrates, this continued issue in the investment world is gaining traction in the media. More importantly, regulators are taking notice and looking for ways to better protect Main Street investors. The SEC recently announced it will host a roundtable on the proxy process, indicating that real change could be on the way for the proxy advisory process. A few issues the chairman looks to review include transparency, legal requirements, regulatory oversight and conflicts of interest – all issues that are in desperate need of reform or clarification when it comes to the proxy advisory process.
For an industry riddled with so many problems, proxy advisory firms and their voting recommendations carry far too much weight. It’s vital that this industry and process are given a careful look so the appropriate regulations and oversight can be enacted.
Ahead of the roundtable, anyone can submit comments for the public record – if you’d like to emphasize the importance of enhanced oversight of the proxy firms click here to submit a comment to the SEC.