Recent Data Analysis, Survey Results Demonstrate Validity of Common Proxy Advisor Concerns

Summary of Study

Bottom Line: Surveys strongly suggest that the concerns expressed by public companies and industry groups about proxy advisors have merit. Surveys suggest widespread "robo-voting," a lack of time to respond to adverse or incorrect proxy recommendations, and outsized proxy advisor influence.  

Proxy advisor recommendations are a key tool for institutional investors, but there are institutions that automatically and without evaluation rely on proxy firms’ recommendations. This phenomenon, called “robo-voting,” has the potential to be a breach of fiduciary duty. 

Compounding the problem of robo-voting, companies often have little-to-no time to respond to erroneous recommendations, leaving little room to correct proxy advisor mistakes before votes are cast. 

Furthermore, academics have written that there is no empirical evidence that proxy advisors’ benchmark governance policies promote shareholder value, effective governance or any meaningful advancement of the advisors’ championed social causes.

Companies were asked to quantify the amount of advance notice they received from the relevant proxy advisor regarding adverse recommendations. Almost 37% of companies reported that the proxy firm ISS did not provide them the opportunity to respond at all. Companies indicated that Glass Lewis was even worse – with 84% of respondents indicating they did not receive any notice from the advisor before an adverse recommendation.

When a company did receive notice, it was often not enough time to generate a response. 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% of these companies indicating they received less than 12 hours notice. 

The survey provides empirical data to support the following conclusions:

  • There is a discernible voting spike in the near aftermath of an adverse advisory recommendation that is consistent with the recommendation.
  • The percentage of shares voted in the first three days represent a significant portion of the typical quorum for public company annual meetings.
  • Companies need more time than they are being given to respond to adverse recommendations.

The outsized power in the hands of proxy advisors has lasting implications for corporate policy, profits, and disclosures.

Policy makers should explore and implement legislative or regulatory measures to assure that:

  • Funds with fiduciary duties to their beneficiaries are not placing undue reliance on the recommendations of third parties.
  • Institutional investors are making fully-informed voting decisions.
  • Investors have more transparency into how their votes are to be cast on a default basis.
  • Public companies are allowed a reasonable opportunity to identify and respond to defects in the analysis of third-party proxy advisors. 

Read the full report here.

Feature Charticle

Advanced Notice of Recommendations

Are Proxy Advisors Really a Problem? Recent Data Analysis and Survey Results Demonstrate the Validity of Common Concerns

By Frank M. Placenti, Squire Patton Boggs for American Center for Capital Formation

Page 8

  • One hundred companies were asked about their experiences in the 2017 and 2016 proxy seasons.
  • Almost 37% of companies reported that ISS did not provide them the opportunity to respond to adverse recommendations.
  • When a company did receive notice, it was often not enough time to generate a response.