Monthly Archives: November 2019

Introduction

Recent research has estimated that the recommendations of proxy advisory firms dictate as much as 25 percent of proxy voting outcomes, with the potential to particularly impact smaller companies. As concern over the power of proxy advisors has led the SEC to consider additional regulation, proxy advisors have suggested that such concerns are unfounded.  ISS CEO Gary Retelny recently stated, for example, that “[t]he biggest misconception is that our institutional investors, which exceed 1,500 globally, just follow ISS blindly.  Nothing could be further from the truth.”  However, as detailed in a November 2018 report from American Council for Capital Formation (ACCF), a significant number of asset managers are indeed automatically voting in-line with the recommendations and policies of the two major proxy advisors–referred to as “robovoting” or “autovoting”–rather than actually evaluating the merits of individual proposal before casting their vote.

Accepting the fact that proxy advisors play an important role in reducing costs for asset managers who must vote shares consistent with their fiduciary duties to beneficial owners, the lack of diligence with which many managers use the services of the advisors is cause for concern, particularly when many of the governance recommendations of proxy advisors are based on thin (or no) empirical evidence. Also of concern is whether investment advisers are providing transparent disclosure regarding their use of those proxy advisors, and whether that disclosure is matched by how reliant they are on proxy advisors’ recommendations. Despite public statements that these advisors are merely data aggregators and independent providers of information, it appears that some institutional investors have become overly reliant on the recommendations of proxy advisors, often outsourcing analysis and voting decisions to the two largest firms in the market without adequate disclosure of that reliance.
READ MORE »