Comment in Advance of SEC Staff Roundtable on Proxy Process

Summary of Study

Bottom Line: Institutional investors have a fiduciary duty to vote, but the use of uninformed and imprecise voting recommendations as provided by proxy advisors should not be their only option. This can be addressed by 1) holding proxy advisors to the standard of an information trader, 2) clarifying that institutional investors can meet their duty by following board of directors' recommendations, and 3) allowing retail investors to transmit voting instructions to their institutional investor informing it that their pro-rata investment in voting stock must be voted in conformity with board of directors' recommendations.

Given the potential for a proxy advisor’s voting recommendations to have a significant impact on voting outcomes, it is critical that these recommendations be targeted toward enhancing long-term shareholder value. However, many critics of proxy advisors argue that a significant number of their voting recommendations incorporate various types of data, analytic, and methodological errors. If implemented, such voting recommendations will lead to sub-optimal corporate decision-making and a reduction in shareholder value. Such imprecision cannot be tolerated in a proxy advisor’s recommendations. 

The following recommendations would reduce reliance on the imprecise voting recommendations of proxy advisors and lead to the enhancement of shareholder voting by institutional investors. The SEC should modify its rules, policies and guidelines to the extent that:

1) When making a voting recommendation, the proxy advisor should be held to the standard of an information trader. If a proxy advisor cannot attest to the use of that standard when generating a voting recommendation, then the proxy advisor must abstain from making that recommendation to its clients. Making a recommendation that does not meet this standard would be a breach of a proxy advisor’s fiduciary duty under the Advisers Act.

2) The SEC, as well as the Department of Labor, should clarify that an institutional investor, as an alternative to using the voting recommendations of a proxy advisor, can meet its fiduciary voting duties by utilizing the voting recommendations provided by the board of directors.

3) Consistent with the prior recommendation and assuming that technical issues can be overcome, retail investors who invest in voting stock indirectly through the use of investment advisers and beneficiaries of public pension funds should have the option of transmitting voting instructions to their institutional investor informing it that their pro-rata investment in voting stock must be voted in conformity with the voting recommendations of the board of directors of each company held in portfolio.

Read the full comment letter here.