The Proxy Advisor System Works
There has been a lot of misinformation spread about proxy advisors and the services they provide to institutional investors. Proxy advisory firms play an important role in helping the tens of millions of individual Americans build a retirement nest egg — and mitigate risks while doing so. But attacks on the system, particularly those made by self-interested lobbyists with their own agendas, ignore the facts.
On behalf of individual “Main Street” investors, institutional advisors cast shareholder votes on impactful corporate governance matters such as CEO pay and the composition of corporate boards. The ability to fulfill this fundamental responsibility requires timely, independent research to help institutional advisors make informed decisions. As a result, in addition to their own research and due diligence, they also rely on the expertise of proxy advisory firms that provide unbiased research, in-depth analysis, data, and voting recommendations.
My firm, Institutional Shareholder Services (ISS), is a leader in the proxy advisory industry. The voting recommendations we develop are in many instances informed by custom policies set by the investors and advisors themselves. To the extent an investor is aligned with a particular ISS policy, our approach is no secret and is posted publicly online.
Proxy advisors were created to help inform those who invest in public companies. There is no obligation for an investor to vote in the manner recommended by the proxy advisor (they often do not), nor is there any requirement that investors even hire a proxy advisory firm in the first place. Institutional investors representing millions of individuals often seek recommendations from multiple sources in order to make up their own minds and cast their own votes.
Critics are quick to suggest, inaccurately, that proxy advisory firms wield undue influence on voting outcomes, but the facts prove otherwise. In 2017, our voting recommendations for the 500 largest U.S. companies aligned with management’s 92 percent of the time. This figure shows that ISS — and by extension the investors for whom we work — are generally in agreement with the governance practices that corporate boards and management are implementing.
The roughly 8 percent of cases where our recommendations diverged from those of corporate management last year were the result of good-faith differences of opinion involving important issues such as director qualifications, dilutive stock option plans, board oversight failures, and executive compensation. What’s more, while ISS recommended against roughly 12 percent of say-on-pay resolutions (which allow shareholders to vote on management compensation) for the top 3,000 U.S. companies last year, only 2 percent failed to pass. Clearly, investors make up their own minds.
Critics have also suggested, once again misleadingly, that there is no oversight of proxy advisors. To the contrary, ISS is a registered investment advisor subject to SEC oversight and the rules and regulations of the Investment Advisors Act of 1940. That act, and related rules and regulations, provide a mature and comprehensive regulatory regime that covers virtually every aspect of the proxy advisory business.
In spite of these facts, special interests are attempting to push legislation through Congress that will establish new and onerous regulations that intrude upon the free market and silence the voices of shareholders. This legislation, deceptively called the Corporate Governance Reform and Transparency Act of 2018 (H.R. 4015), will break the long-standing fiduciary bond between proxy advisors and the institutional investors they advise, undercut the invaluable independence of proxy advisory firms, weaken corporate accountability to shareowners, and potentially increase investment risks for millions of Main Street Americans’ retirement funds.
A new Morning Consult poll of nearly 2,000 registered voters suggests that voters do not want senators to advance the legislation. Specifically, the poll found that 61 percent do not want their senators backing H.R. 4015. In addition, 47 percent of registered voters say institutional investors should get a first look at the research and recommendations prepared by proxy advisers, while only 13 percent say the CEOs and management teams should get a first peek. There is strong support across the political spectrum for this position: 65 percent from Democrats, 61 percent from Republicans, and 55 percent from independents.
The calls to change the proxy advisor system, which include the passage of H.R. 4015 in Congress, are not based on evidence of harm by proxy advisors to shareholders. In fact, SEC Commissioner Robert Jackson, appointed by President Donald Trump, stated recently,
Regulating proxy advisors has long been a top priority for 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.
This fall, the SEC will hold a roundtable where all interested parties will have the opportunity to collaboratively discuss the system and investigate what, if any, reforms or updates are needed. ISS has already shown innumerable times that it is willing to listen and has already incorporated into its processes changes suggested by a number of different constituencies. We will continue to do so.
At the same time, it is crystal clear that this system has worked for decades and misguided regulations such as those proposed in H.R. 4015 are unnecessary. It is also clear that a campaign of misinformation is already at work in Washington ahead of this roundtable. The current system — in which institutional investors (on behalf of their individual clients) research, analyze, and vote their proxies, free of interference from the very publicly traded corporations and their lobbyists — must be protected for the sake of the tens of millions of individual beneficiaries.
Gary Retelny is President & CEO of Institutional Shareholder Services Inc. In conjunction with the Council of Institutional Investors (CII), ISS has launched the educational initiative “Protect the Voice of Shareholders” to correct the inaccurate rhetoric pushed by proponents of H.R. 4015.