Proxy Season 2018: Examining Developments & Looking Forward

Summary of Study

Bottom Line: Momentum to reform the U.S. proxy advisor industry continues to grow. For good reason. Proxy advisor firms are plagued by conflicts of interest, a lack of transparency, and significant errors in voting recommendations. A new survey gives further ammunition to proxy advisor reforms such as the Corporate Governance Reform and Transparency Act, which would require proxy firms to register with the SEC and become subjected to a robust oversight regime.  

Two proxy firms — Institutional Shareholder Services (ISS) and Glass Lewis — control roughly 97 percent of the proxy advisory industry, constituting a corporate governance duopoly, which has been criticized for rampant conflicts of interest, a one-size-fits-all approach to voting recommendation, a lack of willingness to constructively engage with issuers, a lack of transparency on voting recommendations, and frequent and significant errors in analysis.

These problems with the proxy advisors are often cited as a challenge to the willingness of businesses to go and stay public. The U.S. is home to roughly half the number of public companies that existed 20 years ago, and reform of this industry is essential to reversing this troublesome trend. 

In December 2017, the U.S. House of Representatives passed H.R. 4015, the Corporate Governance Reform and Transparency Act of 2017. This bipartisan legislation would require proxy advisory firms to register with the SEC and become subjected to a robust oversight regime. 

The fourth annual CCMC/Nasdaq proxy season survey is intended to help policymakers understand the proxy system and its flaws. If there is a theme to the survey results this year, it is few material improvements have been observed in the proxy advisory system. For instance:

  • 21 percent of the companies surveyed formally requested previews of advisor recommendations. For companies that requested a preview, proxy advisory firms provided them only 44 percent of the time.
  • The amount of time companies were given to respond to recommendations varied. Companies again reported being given anywhere from 30 to 60 minutes to two weeks. In 2018, 1 to 2 days was common.
  • 39 percent of the companies believed that the proxy advisor firms carefully researched and considered all relevant aspects of the particular issue. 
  • 29 percent of the companies pursued opportunities to meet with proxy advisory firms. Of those, their request was denied 57 percent of the time.
  • 10 percent identified significant conflicts of interest at proxy advisory firms.

Read the full report here.