As discussed in this PubCo post and this PubCo post, the role of proxy advisory firms has once again risen to the forefront as a sizzling corporate governance topic, just in time for the SEC Proxy Roundtable on November 15. In advance of the event, interested parties are marshalling their arguments and beginning to present their cases.
In his announcement regarding the proposed proxy roundtable, SEC Chair Jay Clayton raised a number of potential topics, proxy advisory firms among them. More specifically, the Chair suggested as questions for consideration, whether investment advisers and others rely excessively on proxy advisory firms for information aggregation and voting recommendations; whether issuers are allowed a fair shot at raising concerns about recommendations, especially about errors and incomplete or outdated information on which a recommendation is based; whether proxy advisory firm’s voting policies and procedures are sufficiently transparent; whether comparisons of recommendations across similarly situated companies have value; whether any conflicts of interest (e.g., consulting services) are adequately disclosed and mitigated; whether proxy advisory firms should be regulated; and whether prior staff guidance about investment advisers’ responsibilities in voting client proxies and retaining proxy advisory firms should be modified. (As to the last point, that guidance was modified in part by the staff’s withdrawal of two infamous no-action letters. See this PubCo post.) Similarly, at a recent meeting of the SEC’s Investor Advisory Committee, the topic of proxy advisors was also raised by participants who questioned whether, in light of the number of institutions that outsourced their voting decisions, proxy advisory firms had undue influence over the proxy process and whether proxy advisory firms provided equal access to companies and investors.
However, on the other side of the debate is SEC Commissioner Robert Jackson, who, in a statement issued upon the withdrawal by the staff of the two no-action letters, maintained that the SEC recognizes the important role that proxy advisors play “in the shareholder-voting process, and today’s statements do nothing to change that.” More significantly, however, he feared that the SEC’s “efforts to fix corporate democracy will be stymied by misguided and controversial efforts to regulate proxy advisors.” In effect, he was concerned that the recent renewed focus on regulating proxy advisors was a shiny object that might well deflect attention from the serious problems affecting the corporate voting system. In Jackson’s view, the push to regulate proxy advisors has been driven largely by
“corporate lobbyists, who complain that advisors have too much power. There is, of course, little proof of that proposition, and the empirical work that’s been done in the area makes clear that that claim is vastly overstated. Rigorous review of the evidence shows that lobbyists are observing correlation in advisor recommendations and vote outcomes and confusing it for causation, providing no basis for the policy changes they seek. More generally, it’s hard to imagine that, upon a survey of all the problems that plague corporate America today, the Commission could conclude that investors receiving too much advice about how to vote their shares—advice they are free to, and often do, disregard—should be at the top of our list. In fact, the lack of competition among proxy-advisory firms is itself reason for pause, as regulation in the area risks further deepening the moat around the existing players—empowering the very firms that, some worry, already have too much influence.”
Finally, he reiterated his plea “not to allow corporate lobbyists’ priorities to sidetrack our important work in fixing the American system for corporate voting.” (See this PubCo post.)
A case for reform of the proxy advisory industry is presented in this 2018 proxy season survey from Nasdaq and the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness. There, they observe that ISS and Glass Lewis control 97% of the industry, making them “de facto standard setters for corporate governance in the U.S.” However, they argue, they are plagued by conflicts of interest that affect their objectivity, adopt a one-size-fits-all approach, are unwilling to “constructively engage with issuers, particularly small and midsize issuers that are disproportionately impacted by proxy advisory firms,” lack transparency regarding the development of recommendations, and are prone to making analytical errors but unwilling to address them. These problems, they contend, are “often cited as a challenge to the willingness of businesses to go and stay public.” Regulators and legislators have taken some initial steps in overseeing the proxy advisory firms, but, they argue, more reform is needed.
CCMC and Nasdaq conducted the survey during the 2018 proxy season, this year including responses from 165 companies. The theme, they contend is that there have been few improvements: “Companies are bringing more issues to the attention of proxy advisory firms, but they still find it difficult to engage in constructive discussions that lead to better informed voting recommendations. Conflicts of interest still pervade the industry, and many report a lack of transparency into how recommendations are developed.” Moreover, they advise, 97% of companies surveyed support the Corporate Governance Reform and Transparency Act, H.R. 4015, which passed the House, but has not yet passed the Senate. The bill would require proxy advisory firms to register with the SEC, to make prescribed disclosures, to allow companies to comment on recommendations, to designate an ombudsman, to maintain adequate staffing, to publicly disclose their methodologies for the formulation of proxy voting policies and voting recommendations, and to identify any potential or actual conflicts of interest.
The survey results showed that:
- 92% of companies surveyed had an issue in their proxy statements that was the subject of a proxy advisory firm recommendation;
- 83% say that they carefully monitor proxy advisory firm recommendations for accuracy or stale information;
- 21% formally requested previews of recommendations, but were accommodated only 44% of the time; 38% asked to provide input both before and after final recommendations and were typically given one to two days to respond, with a range of 30-60 minutes to two weeks;
- 39% “believed that the proxy advisory firms carefully researched and took into account all relevant aspects of the particular issue on which it provided advice, up from 35% in 2017”;
- 29% sought to meet with proxy advisory firms on proxy proposals, although the request was denied in 57% of the cases, with all reporting “mixed results” from meetings;
- 26% notified the proxy advisory firm and portfolio managers when they believed they were not adequately heard with regard to a proposed recommendation;
- 46% notified portfolio managers and/or the SEC when they believed the data used to make a recommendation was inaccurate or stale, although new reports were rarely issued;
- 39% “advised proxy advisory firms and their clients if specific recommendations did not advance the economic best interests of shareholders”; and
- several companies reported that 10% to 15% (or, alternatively, 25% to 30%) of their shares would be “robo-voted,” where a company’s outstanding shares are voted automatically in line with an ISS or Glass Lewis recommendation in the 24-hour period after the recommendation; and
- 10% identified significant conflicts of interest at proxy advisory firms, and 21% of those alerted the proxy advisor. Notably, some companies said that they were “approached by ISS’ consulting arm soon after a negative recommendation was issued.”
On the other side of the issue is Protect the Voice of Shareholders, a new joint project of ISS and the Council of Institutional Investors formed to lobby against H.R. 4015 and “to correct the record” regarding proxy advisory firms. (Hat tip to thecorporatecounsel.net blog.) The project devotes a page to separating “Myth vs. Fact,” which seeks to put right certain perceived “misinformation.” According to ISS and CII:
- institutional investors are not legally required to engage proxy advisors, but instead voluntarily employ them because they see value in their services and products;
- rather than being unaccountable, ISS “falls under the regulatory authority of the SEC, subject to an existing time-tested regulatory framework and SEC oversight”;
- ISS is a registered investment adviser (as are two other proxy advisory firms) and has fiduciary duties to the investors that hire ISS;
- institutional investors are almost universally opposed to H.R. 4015;
- proxy advisors’ influence “is greatly exaggerated, confusing causation and correlation”; rather, independent research from proxy advisors is valued by investors, but the vote is controlled by the managers of the investors;
- proxy advisory firms do not submit shareholder proposals or control shareholder meeting agendas; accordingly, they do not “push a social and environmental agenda”;
- the methodologies of proxy advisors are not black boxes; some methodologies are custom-designed for specific clients, while other are based solely on public information;
- ISS discloses all real and perceived conflicts of interest to its clients and has a significant relationship disclosure policy;
- H.R. 4015 would stifle competition by imposing burdensome regulations, forcing smaller firms out of the market;
- the SEC’s withdrawal of the two no-action letters did not change the law or the approach institutions must take in performing due diligence on proxy advisors; and
- proxy advisors do no provide cookie-cutter advice, but rather “are hired to provide data, research and analysis, and vote recommendations—specific to clients’ proxy voting policy positions—so that the clients can implement their own proxy voting and corporate governance philosophies.”