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By any measure, the investment system that helps American workers grow their savings is strong, with $28 trillion in retirement assets now invested in public companies. But if you listen to what some are telling policymakers and others within the Beltway, you may be misled into believing that Main Street investors are being neglected by the investment companies they hire and the proxy advisory firms upon which those institutional investors rely for impartial advice.
As the House Financial Services Committee revisits these and related issues, and as we move into the shareholder meeting and proxy season, it’s important to set the record straight on the role of proxy advisers.
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The U.S. investment system is structured in a way that enables workers to entrust their pensions, 401(k)s, individual retirement accounts and other investment accounts to institutions that, in turn, act as fiduciaries for those savers. As large investors, they engage with public companies to discuss financial performance and other strategic matters while also voting at shareholder meetings on issues ranging from chief executive pay to director appointments to stock option plans.
As part of this process, many institutional investors hire proxy advisers to provide them with independent research and analysis. In fact, ISS provides institutional investors with high-quality data, analyses and tailored vote recommendations to help them exercise their ownership rights on thousands of proxy issues. Many investors today routinely use the information and tools that ISS and others provide to help them monitor and engage with the companies they own to assess performance, spot risk and encourage long-term value creation.
There are some who promote a false narrative that investors blindly follow proxy advisers’ recommendations through so-called “robo-voting.” This could not be further from reality and is, in fact, insulting to our clients who as large institutional investors think for themselves and vote according to their own views on corporate governance.
Given that our voting policies reflect input from our investor clients as well as other stakeholders, it should come as no surprise that there may be congruence between the recommendations of proxy advisers and the ultimate voting decisions of institutional investors. It is also worth pointing out that ISS overwhelmingly recommends in favor of management, though, conspicuously, that is rarely cited by the industry’s detractors.
Another important and often omitted fact is that firms such as ISS neither propose shareholder initiatives, nor do they decide what is on the proxy ballot. That’s a decision for company management (and in some limited cases the company’s shareholders).
Another fact is that most of the criteria used to make voting recommendations are custom-designed by institutional investors themselves. In 2018, 85 percent of ISS’ largest 100 clients utilized custom-designed proxy voting policies, while more than three-quarters of all shares voted on behalf of clients by ISS were tied to client custom proxy voting policies.
Let’s be clear: Investors vote according to their own policies. They are not bound to vote in the manner recommended by a proxy adviser; they are not even required to vote at all; and finally, there is no requirement that investors even hire a proxy advisory firm in the first place.
With the U.S. proxy season just around the corner, we are proud of the important role ISS plays in assisting institutional investors as they, in turn, help Americans achieve their financial goals while mitigating portfolio risks. As Congress and the Securities and Exchange Commission continue to examine issues pertaining to the investment system and the role of its players, it is important to sift through the rhetoric behind this truly manufactured crisis and allow for a meaningful, fact-based debate to take place.
Lorraine Kelly is head of governance solutions at ISS, and she is a current committee member for the Best Practice Principles Group, formed in 2013 to promote greater understanding of corporate governance and ESG research and serves on the Council of Institutional Investors’ Markets Advisory Council.
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