Top lobbying firms are intensifying attacks on proxy advisers, with corporations seeking to rein in firms serving the interests of the shareholders who ultimately own them, as regulators consider new rules.
Institutional Shareholder Services and Glass Lewis, two of the best-known advisory businesses, as well as supporters of the existing system, are expected to take the battle to Main Street by highlighting how new measures might affect retail investors, individuals who buy and manage their own stock and rely on the proxy advisers’ analysis when deciding how to vote on oblique and jargon-laced proposals at annual corporate meetings.
ISS and Glass Lewis make recommendations on how shareholders should vote on measures ranging from board membership to executive pay and climate change; ISS’ investors routinely follow their advice, which sometimes opposes the views of a company’s existing board and management.
The looming skirmish, which follows a Securities and Exchange Commission roundtable in November where new rules for the firms were discussed, is expected to center around transparency measures that would identify potential conflicts of interest as well as the tangential question of minimum investment levels needed for shareholders seeking to force a company into specific actions.
“We support the right of investors to have their voices heard through the shareholder proposal process and will continue to evaluate each resolution appearing on company ballots through the lens of our publicly-available policy frameworks and the custom policy approaches we apply on behalf of many of our clients,” said ISS General Counsel Steven Friedman.
Opponents of the firms see the SEC — chaired by Jay Clayton, an appointee of President Trump — as amenable to their arguments and are planning to invest significantly in advocacy efforts. Among them is the U.S. Chamber of Commerce, the nation’s largest business lobbying group, which counts companies like Caterpillar, Pfizer, and American Airlines as members and says the shareholder-voting process is being leveraged by social activists fighting for causes such as environmental protection.
There’s a growing assault on companies “who are being silenced, pressured, or intimidated into advancing narrow special interests — often at the expense of the companies, their shareholders, and their employees,” U.S. Chamber of Commerce CEO Tom Donohue said recently. “These attacks are coming from some activist investors, proxy advisory firms” and some politicians.
The group says it will launch “an aggressive and comprehensive new campaign to meet these coordinated attacks head on,” building on a six-figure ad blitz with the National Association of Manufacturers last year that claimed proxy advisers posed a threat to workers’ retirement plans.
ISS, in response to the campaign, said the firm’s efforts “positively impacts workers’ retirement plans by providing the institutional investors who manage those plans with the information and tools they need to assess and manage governance.”
Manufacturers plan to ramp up their efforts, too. A recent survey of 539 small, medium-sized, and large companies found that nearly 78 percent of respondents were concerned about the actions of proxy advisers, while 56 percent said they divert resources from core operations to contest findings from the firms. Critics say reports that include voting recommendations sometimes contain misleading or false information and are published without notice, giving companies little time to make a rebuttal to investors.
Despite the targeted campaigns, advisers’ allies in D.C. aren’t concerned.
“I’m doubtful there will be legislation that clears Congress,” Ken Bertsch, executive director of the Council of Institutional Investors, which counts ISS and Glass Lewis as associate members, told the Washington Examiner. If the SEC does anything “on direct regulation of proxy advisory firms, it will be limited at most.”
Some members of the council, though, favor change.
“Improvements to transparency would benefit all stakeholders,” investment firm BlackRock wrote in recent comments to the SEC on the topic. “Resolving the existing inefficiencies and opacity would be consistent with our collective desire to enhance the quality of proxy process research.”
The agency might also raise the minimum ownership stake necessary for a shareholder to file a proposal that could — if it won majority support — force corporate action. Currently, any individual with at least $2,000 worth of shares can file such resolutions, and activists on both sides of the political spectrum have used the low threshold to push ideologically-focused measures, a trend that has infuriated corporate America and is driving much of the advocacy.
Opponents argue such a change could effectively prevent Main Street from having a voice in the direction of a firm, ceding the majority of the power to large financial institutions that own significant amounts of stock. Raising the threshold could also dissuade companies from engaging with investors, critics say.
“Under the current system, companies sometimes initially refuse to engage with even large shareowners on critical issues,” Marcie Frost, CEO of the California Public Employees’ Retirement System, one of the country’s largest pension-fund investors, wrote to the SEC. “Making it harder to file shareowner proposals will give companies another reason to dismiss or avoid a request to engage with shareowners.”
In Congress, opponents and supporters alike are watching bipartisan legislation introduced last year by Sens. Jack Reed, D-R.I., David Perdue, R-Ga., Thom Tillis, R-N.C., and others that would mandate the SEC regulate proxy advisers.
The bill is seen as a less extreme version of a measure sponsored by Rep. Sean Duffy, R-Wis., that would require the firms to register with the agency. That legislation passed the House in 2017 with support from both Republicans and Democrats, but failed to move in the Senate.
