The perceived influence of proxy advisors has grown in recent years, but the actual extent of that influence is still unclear. This is one of the findings from a new report produced by Government Accountability Office(GAO) at the request of US Congress members debating HR5311, the bill intended to roll back Dodd Frank reforms.
GAO highlights proxy research market dominance problems
As the report highlights, of the five firms interviewed for the study, ISS and Glass Lewis are the largest and most often used by institutional investors, adding that “ISS’s dominance makes it difficult for competitors to attract clients and compete in the market.”
The report notes the existence of international proxy advisors including Manifest, Pirc, Hermes EOS and BMO reo, although global firms were outside the scope of the review.
Companies want more say over proxy advisors’ reports
During its discussions with stakeholders, the GAO found that proxy advisors apply general voting policies to publicly available company information to develop vote recommendations, which also are based on institutional investor voting instructions and criteria that analysts determine are applicable to the issue being voted on. However, some US companies would still like more engagement with proxy advisory firms as they believe that the firms continue to apply policies in a one-size-fits-all manner, which can lead to recommendations “not in the best interest of shareholders”. Some respondents also indicated that, although there has been an increased level of market outreach by proxy advisors, companies claim that they often do not understand the rationale for some vote recommendations and would like to discuss them before they are finalised. Proxy voting firms said that to maintain research objectivity and satisfy reporting timelines for clients, they limit the breadth of such discussions.
Proxy advisor influence is not clear
The GAO said that market participants and other stakeholders with whom it spoke agreed that with the increased demand for their services, proxy advisory firms’ influence has increased. However, recent studies, market participants, and stakeholders had mixed views about the extent of the influence. For example, some said influence can vary based on institutional investor size. There is less of an influence on large institutional investors that often perform research in-house and have their own voting policies, the GAO said.
US legislators continue scrutiny of proxy advisors
The report, addressed to Dean Heller, chairman of the Senate’s Committee on Banking, Housing, and Urban Affairs’ economic policy subcommittee, follows concerns by members of Congress, industry associations, and academics about proxy advisory firms’ influence on voting and corporate governance, the level of transparency in their methods, and the level of regulatory oversight. Members of the Senate and House of Representatives have criticised the role of proxy firms. As reported by Manifest in June, the Corporate Governance Reform and Transparency Act of 2016 (HR5311) would, if passed, give the Securities and Exchange Commission statutory authority to oversee the proxy advisors and give rights to companies to review reports before they are given to investors.
The Council of Institutional Investors, is strongly resisting HR5311 on that grounds that: “the bill could weaken public company corporate governance in the United States; lessen the fiduciary obligation of proxy advisors to investor clients; and reorient any surviving proxy advisors to serve companies rather than investors.”
Last Updated: 17 November 2016