Managing Relations with Proxy Advisory Firms

Nicholas J Price
5 min read
In recent years, there have been growing concerns about conflicts of interest with respect to proxy advisory firms. New and additional concerns related to proxy advisory firms are looming as well. Last November, the U.S. Chamber of Commerce Center for Capital Markets Competitiveness (CCMC) and Nasdaq's fifth annual proxy survey highlighted that the concerns of many corporations are continuing to get worse rather than better. In addition to concerns about potential conflicts of interest, boards and others are concerned about inaccurate information and robo-votes. The 2019 survey polled 172 companies, and 19% of the respondents said they'd been challenged by conflicts of interest. This percentage was up from only 10% the previous year. Tom Quaadman is the executive vice president at the CCMC. Quaadman expressed his concerns about the lack of oversight and transparency at proxy advisory firms. He continued to say that he believes the lack of transparency has degraded the quality of information that investors rely on to make informed voting decisions. While many related parties are interested in new legislation or policy reform to help appropriately manage relations with proxy advisory firms, there is little real movement on this front at this point.

The Lack of Transparency at Proxy Advisory Firms

It's a known fact that Institutional Shareholder Services (ISS) and Glass Lewis control 97% of the proxy advisory industry. The survey clearly indicated that investors' concerns about conflicts of interest and other issues are warranted. Around 58% of the respondents reported that they'd been approached by the corporate consulting side of ISS at some time within the same year that ISS recommended giving their company a negative vote. On another question, 58% of the respondents indicated that they were aware that a proxy advisory firm had made a recommendation on an issue that was declared in their proxy statements. While survey respondents largely agreed that they'd experienced significant conflicts of interest at proxy advisory firms, only 8% of them pointed them out to the proxy advisory firms in question. Survey responders also highlighted their concerns about proxy advisory firms releasing inaccurate information. Only 39% of companies believed that proxy advisory firms conducted careful research and considered all pertinent aspects of the issues in cases where the proxy firm was providing advice. Companies also expressed frustration over the proxy advisory firms' response to their request to provide input before or after the proxy firm finalized their recommendations. Many companies stated that the proxy firms only gave them a day or two to provide input before the proxy firm released the final report. Some companies indicated proxy firms gave them only hours to provide feedback. Company representatives expressed even further frustration over the proxy firms' response to requests for meetings on shareholder issues. The survey showed that 38% of companies were denied a request for a shareholder meeting in 2017. That percentage increased to 57% in 2018 and it increased again to 60% by 2019. Companies were not always inclined to report such incidents, which led to poor relations with proxy advisory firms. Only 41% of the companies that discovered inaccurate or outdated information on vote recommendations decided to report the issue to the proxy advisory firm, portfolio managers or the Securities and Exchange Commission (SEC). Perhaps what is of even greater concern is the increasing use of robo-votes. Many corporations are taking note of the fact that when ISS or Glass Lewis makes a recommendation, they receive a large percentage of shares being robo-voted within 24-48 hours after the proxy advisory firm recommendation.

What Do the Proxy Firms Have to Say?

Subodh Mishra is the executive director of communications at ISS. He responded to the survey by saying, “…as a Registered Investment Adviser, ISS takes the fiduciary duty of loyalty very seriously and has developed a comprehensive program to manage potential conflicts of interest as required by the Advisers Act and related SEC rules.” Mishra also pointed out that ISS Corporate Solutions, which is also known as ICS, is a wholly owned subsidiary of ISS and that they are in the business of providing governance data, analytics and services to corporate issuer clients. Mishra emphasized, “ICS does not and cannot provide any client with any assurance as to how ISS will recommend with respect to the matters that appear on any client’s proxy statement.”

Glass Lewis declined to comment on the survey's results.

The SEC Is Interested in Reform

NASDAQ Vice Chairman Ed Knight believes proxy battles are an increasingly costly distraction for public companies. He is in favor of a proxy system that is transparent, accurate and verifiable, and one that is oriented toward long-term value creation. Knight feels that reform is essential to constructive shareholder engagement and the ability of companies to successfully operate public companies.

Tom Quaadman hopes that the survey will help to inform ongoing efforts around proxy advisory system reform. Quaadman also stated that CCMC looks forward to working with the policymakers and the SEC to improve the transparency, accuracy and relevancy of the process for recommendations by proxy advisors.

As a start, last November, the SEC voted to propose amendments to rules that would govern proxy solicitations to improve disclosures by proxy advisory firms to their customers about conflicts of interest. If the rules should be finalized, they would also give companies a reasonable amount of time to review and provide feedback when they detect errors or misinformation in proxy voting recommendations.

The SEC Chairman Jay Clayton approved the proposal. Clayton said the rules acknowledge the important role that proxy advisory firms play in the marketplace and how their role benefits investors. He also acknowledged that investors rely more and more on the advice, services and reports of proxy voting advice.

Earlier in 2019, the SEC publicly issued proxy advisor guidance that outlines that any proxy voting advice that's given by request of the investors will be subject to the mandates for proxy solicitation under the Securities Exchange Act of 1934. ISS filed a lawsuit in federal court in Washington, D.C., last October asking to have the guidance set aside.