A leading proxy adviser is defending its business model against increasing attacks from lawmakers and top business groups, arguing that its work is critical to ensuring investors have a voice in corporate governance issues.
Companies like Institutional Shareholder Services and Glass Lewis make recommendations on how shareholders should vote on proposals ranging from board membership to executive pay and climate change. Institutional investors routinely follow their advice, which sometimes opposes the views of a company’s existing board and management.
“Proxy advisers have become a surrogate for shareholders themselves in the debate regarding what kind of voice investors should have in the companies they own,” ISS said in comments submitted to the Securities and Exchange Commission prior to the agency’s Nov. 15 roundtable on the role of such firms and how they should be regulated.
Scheduled speakers will include representatives from corporations including UnitedHealth, General Motors and Nasdaq, as well as ISS and rival adviser Glass Lewis, according to an agenda released on Thursday. ISS said it “looks forward to a robust and balanced discussion.”
Critics say the two firms publish reports with misleading or false information without notice, giving companies little time to make their competing case to shareholders. They also charge that passive investors like BlackRock or Vanguard – who have substantial voting power because they own large swaths of stock – blindly follow their voting recommendations, enhancing the influence of proxy advisers.
ISS clients are “sophisticated institutional investors who are free to follow our recommendations or not,” the firm countered in its written comments. “ISS provides institutional investors with critical assistance in analyzing and synthesizing an enormous volume of information in a short period of time, thereby giving investors a meaningful voice in corporate governance while maximizing the efficient use of limited manager resources.”
Institutional investors often follow the recommendations because they are “tailored to their own views on corporate governance, not because they follow our advice without thought or intention,” ISS added.
The firm argued that it gives companies ample time to raise concerns about potential errors in reports, but said that most of the statements that companies consider mistaken are “differences in philosophy, interpretation or, simply, outright disagreements” with an investor’s voting policies.
Giving companies additional influence on the reports would “interfere with a proxy adviser’s fiduciary responsibility to its clients, and hurt both investors and the integrity of the voting process,” ISS wrote.
Exacerbating concerns around the process is the rise of activist groups who push more politically-motivated proposals on climate change, health care, diversity and other issues that businesses argue are daily management issues outside of the board’s purview.
Backing for such proposals from Glass Lewis and ISS often amplifies the support they receive, to the chagrin of company leadership.
“ISS does not choose the ballots or agenda items on which it renders advice,” the firm wrote to the SEC. “At a client’s direction, ISS has a fiduciary duty to analyze and provide a voting recommendation for each agenda item related to every equity security held in clients’ portfolios.”
A bill that passed the Republican-controlled House last year would have required the advisory firms to register with the SEC and highlight potential conflicts of interest, but it stalled in the Senate. The measure was introduced by Republican U.S. Rep. Sean Duffy, who was re-elected to his Wisconsin seat on Tuesday.
