Report: Proxy Firms May Be Leading Investors Astray
Investment managers looking for advice on how to cast votes on shareholder proposals at portfolio companies could be getting questionable guidance from advisory firms, according to a new economic report. The growing influence of these firms is coming under scrutiny by federal regulators.
Proxy advisory firms, which provide advice to fund managers and other investors that are required to vote on questions put to shareholders of companies in their funds, have grown too powerful, with little oversight over whether their recommendations serve the best interests of individual investors, says Capital Policy Analytics. The report concludes:
The potential conflicts of interest, factually inaccurate guidance, and a lack of transparency that can arise from a reliance on proxy advisory firms tend to dilute the focus on stock performance and maximizing returns in favor of other special interests.
The firms’ recommendations have become an influential force for publicly traded companies, raising concerns among both industry players and lawmakers. The report suggests that activist investors and large public pension funds increasingly seize on proxy votes as a tool for social change, and many fund managers required to cast votes on every proposal must rely on the proxy advisors’ views of those proposals, instead of individual investors’ priorities.
“After a big debate on fiduciary rules predicated on the fact that sacrificing even small returns can have large long-term consequences, that reality can be shunted aside when we discuss proxy advisory firms,” said Ike Brannon, the report’s lead author. He also cited the “increasing predilection of managers — often nudged by proxy advisory firms with their own agenda — to consider issues other than returns.” “I don’t think that investors realize that this development is not necessarily in their best interest,” he said.
The report comes as the role of proxy advisors gets a fresh look from regulators and lawmakers. The Securities and Exchange Commission last month revoked its previous guidance on how investment managers use the firms’ advice. The SEC plans next month to host a roundtable on the proxy process that will include discussion of the role of proxy advisors.
Meanwhile, proposed legislation that would require proxy advisors to register with the SEC and increase disclosure and transparency requirements on the firms passed the House in December and awaits action by the Senate Banking Committee.
The Capital Policy Analytics report recommends greater transparency and further steps to rein in the firms’ power. It also raises the question of removing the requirement that financial managers vote their proxies, arguing that granting those managers more leeway “might make them more engaged on these issues than they currently are.”
“It is perfectly fine for people to choose to do ethical investing with their own money,” said Jared Whitley, the study’s co-author. “But proxy advisory firms can often nudge firms to behave this way with other people’s money. It is a troubling situation that deserves more scrutiny.”
Jerry Rogers is the founder of Capitol Allies, an independent, nonpartisan effort that promotes free enterprise. He’s the co-host of The LangerCast on the RELM Network. Twitter: @CapitolAllies.