On June 30, the Securities and Exchange Commission issued new rules clarifying the duties of proxy advisory firms that guide institutional investors voting their equity shares.
Left unresolved by the SEC is an April rulemaking petition by business groups that asked the agency to reconsider its “resubmission thresholds” for shareholder proposals that appear on proxy statements. The two issues intersect, and the commission still has work to do.
Federal regulations require institutional investors—like pension and mutual funds—to cast informed votes on matters submitted to shareholders on corporate proxies. For funds striving to attract capital and increase returns, however, there is little reason to invest in becoming a “more informed” voter on most matters, any more than there is for the average participant in political elections, where voter ignorance runs rampant.
Enter the proxy adviser. At relatively low cost, institutional investors can outsource their proxy voting to a third party specialized in the issue. How low cost? Institutional Shareholder Services, which has a roughly two-thirds market share in the proxy-advisory business, has scarcely $10 million in annual profits on $100 million in revenues — a drop in the bucket in terms of the broader equity markets. Making voting recommendations across all companies in a global market is quite a task on such a shoestring budget, and that’s why the new SEC rules requiring proxy advisors to get it right matter.
Though investors don’t pay much for proxy advisors’ services, these firms have emerged as a major force in shareholder voting. According to a Manhattan Institute study of proxy voting on shareholder proposals, controlling for other factors in econometric analysis, an ISS recommendation “For” a given shareholder proposal increases the shareholder vote by an average of 15 percentage points. At least when it comes to shareholder proposals, a small, thinly funded outfit with 600 employees in Rockville, Md., is acting like an owner of 15 percent of the total stock market.
Fifteen percent of the vote may not sound like much, but it most certainly is in the context of the SEC’s “resubmission threshold” rules. Under current commission guidelines, a shareholder activist can propose substantively identical proposals on the ballot, year after year, so long as at least 10 percent of shareholders vote for the proposal.
With such a low bar, a small subset of investors that wants to change the way corporations do business — especially “socially conscious” investing funds and pension funds affiliated with organized labor — have worked hard to convince ISS to embrace their program. These efforts have paid off: ISS has been far more likely than the median shareholder to support environment-related shareholder proposals, and ISS has backed virtually all shareholder proposals seeking to increase corporate disclosures of political participation.
No such proposal has received the support of a majority of shareholders, over board opposition, at any Fortune 250 company. But with ISS support, they keep cropping up. Each year between 2007 and 2013, the Sisters of St. Dominic sponsored a shareholder proposal at Exxon Mobil calling on the oil giant to produce a report on its greenhouse gas emissions; between 68 and 74 percent of shareholders voted against the proposal every time. Social-investing firms and religious investors backed a political-spending-disclosure proposal at CVS Caremark every year from 2008 through 2013, which was consistently opposed by between 65 and 72 percent of shareholders.
When socially activist investors repeatedly foist costs upon companies, these costs are ultimately borne by the majority of shareholders who prefer to maximize shareholder return — and who vote against these proposals, time after time. To protect the average investor, the SEC needs to rethink the rules.James R. Copland, director of the Center for Legal Policy at the Manhattan Institute, oversees its ProxyMonitor.org database covering shareholder proposals at the 250 largest publicly traded companies.