Proxy advisory firms have long been the “go-to” resource for investment adviser voting information, which emphasizes the importance the role of proxy advisors play in boardroom activities. Elad Roisman is the newest Securities and Exchange Commission (SEC) commissioner and he’s come forth stating that he expects the SEC to issue new guidance on proxy advisory firms after this year’s proxy season. Roisman has been expressing some of the same concerns as other interested parties. Like many others, he’s troubled by the continuation of proxy advisory firms that offer investment advice to companies while making recommendations to shareholders at the same time.
Many financial experts believe that it’s time to rein in the rules around proxy advisory firms like Institutional Shareholder Services (ISS) and Glass Lewis. The SEC has a couple of options at its disposal. The SEC could limit their involvement to providing guidance to institutional investors or they could take a stronger stance and impose regulations on proxy advisory firms.
Long-standing Controversy Over the Role of Proxy Advisors
Proxy advisory firms are fiduciaries. Thus, they must abide by the duty of care and the duty of loyalty to their clients.
The SEC requires investment advisers to work in the best interests of their clients and they’re required to have policies and procedures in place to support that. One way that advisers could demonstrate that they voted proxies in their client’s best interests is by voting on the recommendations of a third-party proxy advisory firm like ISS or Glass Lewis. This step alleviates any potential conflict of interest on the part of the investment advisers.
Proxy advisory firms resolve one problem and create another one. Their existence sets up situations where investment advisers are over-relying on proxy advisory firms. There is rampant concern within the financial industry that proxy advisory firms have too much power, too much influence and not enough accountability.
To help iron out the situation, the SEC put the onus on investment advisers to determine whether a proxy advisory firm has the capacity and competency to appropriately analyze proxy issues. While the SEC hasn’t taken a strong stand on this to date, they have noted that they’re concerned over the amount of power that proxy advisory firms have.
For the present, the SEC hasn’t called for registration or regulation of proxy advisory firms. There is some speculation that taking stronger action would initiate fear of rising costs that would be necessary as a result of registration and further regulation.
While the SEC has yet to move on this issue with any substance, legislators have expressed their concerns about the stronghold that proxy advisory firms have. Federal legislators have regularly been introducing legislation that would require the SEC to regulate proxy advisory firms. The most recent attempt at this was the introduction of the Corporate Governance Fairness Act in 2018, which was introduced by Senator Mike Reed of Rhode Island.
Senator Mike Crapo of Idaho is the committee chairman of the Senate Banking, Housing, and Urban Affairs Committee, and he’s stated publicly that he’d like to see the SEC build off the progress that was made at their proxy advisory roundtable just last year. He expressed optimism that they can build off of the previous momentum on the issue.
Another major concern that came forth during the proxy advisory roundtable is the lack of competition for ISS and Glass Lewis. Thomas Quaadman, the Vice President at the U.S. Chamber Center of Capital Markets Competitiveness and a panelist on the proxy advisory roundtable, expressed his disappointment about the inability of other proxy advisory firms to enter the space and be sustainable because of barriers to the entry process. Quaadman also expressed frustration about there being a level of oversight to make sure that there are proper rules for proxy advisory firms and that the playing field is level because of the inability of firms like PGI and Proxy Mosaic to compete with ISS and Glass Lewis.
Additional Issues Associated with the Role of Proxy Advisory Firms
Other issues that surfaced at the proxy advisory roundtable were related to robo-voting, conflicts of interest, and difficulty in correcting inaccurate or erroneous records.
Some investors and companies expressed concerns about robo-voting within the industry and the potential for fraud. Proxy advisory firms countered by saying that there is very little robo-voting as it pertains to proxy advisory voting.
Proxy advisory firms also addressed concerns about conflicts of interest by saying that disclosures and ethical walls were enough to counter those concerns.
Smaller companies voiced their concerns about the difficulty of being able to correct erroneous records due to the lack of finances and resources.
ISS and Glass Lewis maintain that proxy advisory firms don’t drive voting decisions. Investors should have their own procedures and policies and follow them, which should be sufficient on their own. ISS and Glass Lewis also stated that they merely help investment advisers to execute votes in accordance with their instructions. Glass Lewis added that 80% of their voting instructions were customized.
Investment advisors were quick to point out that proxy advisory firms perform a host of other functions for them including independent research, workflow management and data aggregation. In addition, proxy advisory firms help investment advisers to fulfill their fiduciary duties and execute some of the mechanics. Investment advisers prefer to outsource research matters, so that their in-house teams have more time to invest in investment analysis.
Additional Views on Proxy Advisor Regulation
The U.S. Chamber of Commerce, the National Association of Manufacturers, NASDAQ and NYSE have invested their own funds in taking a proactive stance toward regulating advisory firms. Over 300 companies signed onto a NASDAQ letter asking the SEC to take stronger action to regulate advisory firms.
Companies would like to have more leeway in their ability to address proxy advisory firms’ recommendations before they have to send them off to shareholders. More time would give them the ability to address errors in the recommendations.
The role of proxy advisory firms is complex and multifaceted, with no shortage of opinions on all sides. Many financial experts question whether we need proxy advisory firms in this day and age at all. Investment advisers are the ones who are paying the proxy advisors so they believe they should be the ones to decide whether any sort of regulation is necessary. Changes later this year may indicate what the next direction is for the role of proxy advisors.
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