Is the Proxy Advisory Industry in Danger?
The Securities and Exchange Commission (SEC or the Commission) appears to support new oversight for firms that advise investors on voting their shares in public companies.
The SEC vote 21 August 2019 on whether to issue guidance on investment adviser responsibilities when using so-called proxy firms, passed 3-2. A second item on the open meeting’s agenda directed at proxy advice is expected to revamp the regulatory framework for firms that currently are exempt from certain proxy-related rules.
Proxy advisers, such as like Institutional Shareholder Services Inc. and Glass, Lewis & Co., have become the most closely watched aspect of the commission’s yearlong review of the proxy voting system. These advisers are viewed as tools that empower investors to challenge company management on their pay packages and other issues that go up for a shareholder vote.
The SEC is also weighing whether to tighten thresholds for submitting ballot items that shareholders increasingly use to press companies on social and environmental issues. This effort is part of a broader look at the decades-old infrastructure behind casting and counting shareholder votes, known as proxy plumbing.
CFA Institute is concerned about the recent public announcement that the SEC will meet next week to consider publishing a “Commission Interpretation” and “Guidance” concerning the regulation of proxy advisers. We encourage the Commission to release any guidance for public comment so that investors can share their thoughts and concerns. We also are concerned that Commission interpretation and guidance could impose costly requirements on proxy advisory firms. These added requirements will result in increased costs for investors before they have a proper chance for review and comment.
The investors who use proxy advisers are not calling for regulation of these entities. These investors have their own policies and procedures that drive their voting processes, and they do not rely on the recommendations of proxy advisors. Investor primarily—
- use proxy firms to handle the simple mechanics of voting thousands of proxies; and
- use the research provided by proxy firms as one of the many data sets that inform their own research processes.
Issuers often assert that advisers have an undue influence on the proxy voting process, although the issue-by-issue recommendations of proxy advisers are generally built or aggregated from the views of their clients.
Issuers have requested greater opportunity to review proxy adviser reports and a chance to rebut claims made in the reports. The panel’s investor representatives have noted that, as the primary customers of proxy advisory firms, investors generally are satisfied with the level of service they are receiving. In addition, increased regulation is an unnecessary cost that ultimately will be passed on to investors, hurting their financial returns in the long run.
Such a policy could set a dangerous precedent. Can you imagine if investment managers were required to ensure that the advice and investment research they use — either proxy advice or, more fundamentally, financial analyst research — was vetted with the issuer? Such a move would result in the sell-side portion of the financial analysis industry screeching to a halt.
Financial analysis, whether investment analysis or proxy analysis, should be independent and free of issuer intrusion.
Increased engagement on the part of issuers with investors is a more cost-effective solution. Issuers can inoculate themselves from any surprises from proxy adviser recommendations by investing in an engagement program with their top shareowners. When issuers and investors talk regularly, there are no surprises in the issuer and investor relationship.
Because proxy advisers sometimes are the messenger delivering bad news, they make convenient scapegoats. Making it harder and more expensive for messengers to do their job does not solve this problem. It just makes the money management industry more costly without providing any real benefit, and those costs will be passed on to customers.
Of course, proxy advisers should make every effort to minimize errors and conflicts of interests. Onerous regulation that only add costs for investors with no discernable benefit is not the answer.
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