Astroturf, patented as “Chemgrass,” emerged in the Houston Astrodome in 1966. It was cheaper than the real thing. Its political meaning blossomed in the Obama years, when regulators were flooded with boilerplate comments seemingly from ordinary citizens.
“Astroturfing” is back. This time facing the Securities and Exchange Commission, which is seeking comments on the corporate proxy process.
This month, as many Fortune 500 companies hold their annual shareholder meetings – otherwise known as “proxy season” – the proxy process and proxy advisors have come under the spotlight.
Last year, the SEC asked for public comments to review the corporate proxy process, a key step in making a new regulation. Corporate proxy statements include executive pay policies, audit committee matters or other sensitive issues. Firms usually hire advisers to evaluate these statements and make recommendations.
The SEC’s call for public comments crowns nearly a year of work at the commission. SEC Chairman Jay Clayton announced a roundtable “to hear from investors, issuers, and other market participants about whether the SEC’s proxy rules should be refined” in July 2018. Next, the SEC’s Division of Investment Management withdrew two letters, issued in 2004, in September 2018. These “letters”— binding rules — said that an investment firm’s reliance on proxy advisors’ recommendations complied with Rule 206(4)(6) of the Investment Act of 1940. These 2004 letters created the modern proxy advisory industry and their withdrawal puts its future in doubt.
The SEC held a roundtable in November 2018 to discuss the proxy-voting mechanics and technology, the shareholder proposal process and the possible regulation of proxy advisory firms. Elad Roisman, the SEC Commissioner charged with reviewing changes to the proxy process, has reportedly stated that new rule guidance may come after the 2019 proxy season.
All of this is alarming to proxy advisors, who have long enjoyed a profitable perch and now may be shaken off of it.
Two companies — Glass Lewis and Institutional Shareholder Services — control 97 percent of the proxy advisory market, according to Pensions and Investments. This duopoly drafts proxy proposals, analyzes proxies and makes voting recommendations on proxies. In some cases, they even vote client’s proxies for them. So a single firm could write a corporate policy it favors, provide an analysis of it and advise their clients on how to vote. Research shows that their clients vote these firm’s “one size fits all” recommendations without further scrutiny. As a result, these two firms enjoy enormous power over the corporate governance — without any outside check.
Why is this a problem? Reformers point to three concerns.
Conflicts of Interest. Proxy advisory firms serve both corporations and investors, which provides a clear conflict of interest. A recent Manhattan Institute study shows that “proxy advisory firms that also engage in consulting arrangements with corporate issuers exhibit favoritism towards management” to prove that conflicts exist and impact these firms’ recommendations. The dominant duopoly are affiliated with investment firms who often have a stake in the firms that the proxy statements would affect. They are not truly independent. Glass Lewis is jointly owned by the Ontario Teacher’s Pension Board (OTPP) and a hedge fund, Alberta Investment Management Corporation (AIMCo). ISS is owned by private equity firm Genstar Capital.
Ideological Bias. Too often, proxy advisors provide one-size-fits-all recommendations, which usually tilt left. Both Glass Lewis and ISS support “environmental, social and governance” guidance despite scholarly evidence that such strategies often fail to produce the best returns. This strategy sometimes involves excluding ownership in politically incorrect industries that, at different times, outperform the overall market. In short, the proxy duopoly puts politics ahead of shareholder returns. If you are planning on using your investments to fund your retirement, political proxies may not be helping you reach your goals.
Outsized Influence. Proxy advisory firms control the entire supply chain, from drafting to voting. Meanwhile, they also provide consulting services to teach firms how to win favorable recommendations for their own proxy motions.
Reformers want proxy advisory firms to adhere to rules regarding fiduciary duty, disclose conflicts of interest and register with the SEC. These reforms would create greater transparency to ensure the public and investors are fully aware of the duopoly’s practices
Which brings us to the Astroturf. The SEC docket has 262 unique comments from investors, executives, pensioners, fund managers and others as of June 11.
Evidence of “Astroturfing” suffuses the public SEC docket: One group submitted a form letter with 18,613 signatories without any names associated. Additionally, we found 21 variations of the comment in the docket from December 12 through January 1, 2019. These 21 comments were all signed “Anonymous.” All of these nameless comments opposed reform.
Despite the Astroturf, I estimate the SEC docket shows strong support for reform: 150 backed reform, 110 defended the status quo, two favored neither side. The pro-reform comments cited a range of reasons:
- 48 comments cited proxy advisory firms’ complete control over corporate governance.
- 51 comments highlighted the need for proxy advisory firms to exercise some fiduciary responsibility.
- 32 cited the lack of regulatory oversight of these firms.
- 54 highlighted proxy advisory firms’ favorability toward perceived environmental, social, and governance (ESG) factors as problematic. That is, putting politics ahead of an investor’s financial interests.
- 74 cited a lack of transparency on the part of proxy advisory firms.
All of which makes you wonder: If the status quo is so great, why does it require miles of Astroturf (fake commenters) to defend it?
Richard Miniter is a bestselling author and investigative journalist.
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