Your Investment Dollars May Be Used With Little Or No Oversight
On Thursday the Securities and Exchange Commission will hold a roundtable discussion on the proxy process, the system by which thousands of shareholder proposals are voted and decided on each year. These votes range on issues from board of director candidates, to new corporate practices and corporate disclosures. The results of these votes carry real impact on a company’s policies and performance and most importantly on returns for investors.
Despite this significance, many financial institutions and asset managers are automatically voting in line with the recommendation of third-party proxy advisory firms who have no fiduciary responsibility, failing to evaluate the merits of the recommendations or the analysis underpinning them, in a process known as "robo-voting." The result is that hundreds of firms with trillions of dollars in assets under management – money from vehicles such as retirement savings, active investments, and 401k dollars – are voting their shares with a third party advisor that is not obliged to maximize the value of their holdings.
In fact, according to new research by the American Council on Capital Formation, 175 asset managers with over $5 trillion in assets under management have historically voted in line with Institutional Shareholder Services, or ISS, the largest and most dominant proxy advisory firm, more than 95% of the time. Going a level deeper, 82 of these asset managers, with over $1.3 trillion in assets under management, have historically voted with ISS on these proposals more than 99% of the time. This practice is prevalent across investors of all sizes and types.
Compounding this problem, ISS has come under scrutiny for numerous failings, including conflicts of interests, one-size fits all guidance, and issuing recommendations that are based on faulty data. Recently, ACCF commissioned research from corporate governance expert Frank Placenti of Squire Patton Boggs, which found that proxy advisor reports are often factually or analytically flawed and provide limited time for companies to respond to errors – leaving thousands of votes to be influenced by inaccurate recommendations.
Based on a survey of 100 companies and their experiences during the 2016 and 2017 Proxy Seasons, 37% of respondents reported that ISS did not provide them the opportunity to respond at all to an adverse recommendation. Nearly 85% of companies that were given notice from ISS indicated they received less than 72 hours to respond to the adverse recommendation, with roughly 36% indicating they received less than 12 hours notice. Meanwhile, 100% of companies stated they require at least three business days to respond.
The unavoidable conclusion is that proxy advisory firms are emerging as the "quasi-regulators" of our capital markets. They formulate their own viewpoint on how a company should operate without any statutory authority, rely on unaudited data sources for recommendations, and in some case provide consulting services to the same companies they are making recommendations for and against.
The good news is the SEC has taken notice of this concerning development and is convening a roundtable discussion to determine whether reform is needed. As a part of its outreach, the Commission is soliciting comments on proposed solutions. Investors of all kinds should consider participating in the process, in order to help make certain that their investments won’t be sacrificed pursuing someone else’s political agenda.