Additional regulation is needed to curb the growing influence of advisory firms on corporate shareholder votes, one former federal official plans to tell the Senate Banking Committee on Thursday.
The panel’s hearing on the proxy-voting process comes as the Securities and Exchange Commission explores putting new rules into place for firms like Glass Lewis and Institutional Shareholder Services, which provide recommendations to shareholders casting ballots on matters from CEO pay to corporate diversity that arise during a company’s annual investor meeting.
Critics charge that the firms have grown too powerful as large investors like pension funds — which often own a large amount of stock in a particular company and can significantly sway a decision one way or the other — follow their advice.
“The current environment creates an undue reliance on proxy advisory firms that policymakers did not anticipate as they worked to address the evolving shareholder voting landscape,” Daniel Gallagher, a prior SEC commissioner appointed by former-President Barack Obama in 2011, wrote in prepared testimony. And without congressional attention to the issue, “the outsized role of proxy advisory firms will only continue to grow.”
Supporters say the push for regulation is part of a drive by Corporate America to nullify shareholder rights and avoid having to deal with contentious proposals that don’t align with the wishes of management or boards.
“We expect companies to create long-term, sustainable value; we push them to address a range of environmental, social and governance risks that are fundamental to ensuring long-term profitability,” Michael Garland of the New York City Comptroller’s Office, which manages five of the city’s public pension funds, wrote in his testimony. “We oppose any SEC actions that would infringe on these fundamental investor rights, which in their present form have served investors and market participants well.”
ISS, in a statement, said it provides “sophisticated investors with unbiased analyses and data-driven vote recommendations on the companies in which they invest, recommendations which are reflective of their own corporate governance policies and views.”
In a letter to the SEC last month, Blackrock said improvements to transparency around proxy advisory firms “would benefit all stakeholders.”
“Resolving the existing inefficiencies and opacity would be consistent with our collective desire to enhance the quality of proxy process research and promote competition within the industry,” the investment management firm wrote.
Organizations backing new rules for the proxy firms — which include the U.S. Chamber of Commerce and the National Association of Manufacturers — often cite a consulting business that Institutional Shareholder Services operates as a reason for their concerns. Telling investors how to vote on corporate governance issues while advising the same companies on similar matters is a “seemingly obvious, and insurmountable, conflict of interest for the proxy adviser,” Gallagher wrote.
While ISS says it has barriers in place to prevent any conflicts of interest, Gallagher says the firm still runs the risk of being too “lenient in formulating voting recommendations for companies that are their clients and harsh in crafting the recommendations for those companies that have refused to retain their services.”
One proposal under consideration is requiring additional communication between the proxy advisory firms and the companies on which they’re issuing reports. Such a move could address a complaint from U.S. businesses that recommendations from ISS and Glass Lewis often contain factual errors that can be difficult, if not impossible, to correct.
The potential delay in issuing reports, however, would give investors “less time for our due diligence on each proxy vote,” New York City’s Garland argued. ISS also said it is “inappropriate to mandate that proxy advisers to hand their work over to the management of the companies being analyzed for review and comment before it can be provided to the investor clients whom we serve.”
A bipartisan group of senators introduced legislation in November to increase federal oversight of proxy firms, including periodic reviews by the SEC for potential conflicts of interest. The House previously passed a bill to require ISS and Glass Lewis to register with the SEC, but that measure has not advanced in the Senate.
It’s highly unlikely any legislation on the issue will be passed before the end of 2018, but the interest from both parties signals it could come up again next year when Democrats retake control of the House of Representatives.
