Proxy-advisory services used to be an obscure feature of corporate America. No longer.
These geeky outfits, which review mountains of proposals put forward by shareholders on topics ranging from mergers and executive pay to climate change and diversity, then issue recommendations, can sway how their clients vote.
Given that most are big institutional investors with clout, this advice matters.
Big institutional investors like Capital Group and Fidelity have in-house teams to deal with such matters. But most funds rely on outside advisers. Two of them control 97% of the United States’ proxy-advice market: Institutional Shareholder Services (ISS), owned by Genstar, aU.S. private-equity firm, and Glass Lewis, owned by two Canadian asset managers.
Their client base has boomed, as the number of proxy battles continues to rise.
Business lobbies have had enough. Tom Quaadman of the U.S. Chamber of Commerce argues that the firms lack transparency and have “significant” conflicts of interest arising from their consulting divisions. A chamber report last year bemoaned an onslaught of “zombie proposals,” which come up repeatedly — and repeatedly fail to win a majority of votes.
In August, The U.S. Securities and Exchange Commission ruled that voting recommendations made by the advisers amounted to “solicitations” under proxy rules, a higher regulatory standard than the firms faced before. They would, for instance, have to prove compliance with anti-fraud provisions. ISS has sued over the measure.
On Nov. 5, the SEC proposed more rule changes “to improve the accuracy and transparency of proxy voting advice.” Among other things, these would raise the minimum share of votes required for shareholder proposals to succeed and let target firms review proxy recommendations twice before investors see them.
The National Association of Manufacturers, one of those spearheading the proxy war, declared that the proposal was “a significant victory” that “sets up reasonable guardrails” on the proxy process.
Nonsense, said critics of the new provisions, who liken them to slapping a tax on advice critical of management. Charles Elson of the University of Delaware argues that the SEC proposal is “a punitive solution looking for a problem.”
The SEC is likely to make a final ruling early next year. The advisory firms could then challenge it.