March 10, 2020 at 5:00 am ET
The Securities and Exchange Commission is now in the process of finalizing its proposal to regulate proxy advisors. If finalized in its current form, the proposal will greatly enhance the information available to investors because all companies will be given an opportunity to review proxy advisors’ recommendations for factual errors and provide a response if there are any issues.
The new requirement will not give companies a right of veto over proxy firms’ recommendations as some have claimed, but rather it will allow investors to easily view a company’s rationale for disagreeing with a recommendation before deciding how to vote, which the SEC has affirmed is a basic fiduciary duty that asset managers owe their clients.
The two leading proxy advisors, ISS and Glass Lewis, have both vehemently opposed the proposed rule. As ISS argued, “The Commission would be ordering advisers to share confidential, proprietary information with potentially disagreeing (and sometimes hostile) third parties who are the subjects of the research and therefore inherently conflicted before sharing it with their own clients, thereby destroying the confidentiality of this information and interfering with the adviser-client relationship.”
But that argument ignores an important fact. Both proxy firms already offer companies a chance to review recommendations under certain circumstances. ISS in fact allows companies in the S&P 500 to review draft recommendations, while Glass Lewis launched a pilot program for a select number of companies to review and respond to its guidance.
Meanwhile in France, ISS has explicitly stated that it “believes that this review process helps improving the accuracy and quality of its analyses, an outcome that is in the best interests of both the institutional investors for whom the analyses are prepared, as well as for the issuers that are the subject of these reports.”
As SEC Commissioner Elad Roisman has stressed, the proposal has deliberately been created “using practices and strategies already accepted in the marketplace” and will simply codify these opportunities to ensure they are available to all companies, not just those with the largest market capitalization or others who are willing to pay a fee to be able to review their recommendations.
That is why the SEC’s proposed solution is to require that proxy advisors allow all companies an opportunity to review proxy advisor recommendations for factual accuracy before the recommendation is sent to investors. Then, when recommendations are finalized, all companies would be able to review once more and add a response that would be hyperlinked into the report to provide investors with additional information if warranted.
While this solution will be effective in giving investors more information and clarifying any errors in guidance, it will not address one of the biggest criticisms of the industry, the practice of automatic or “robo-voting,” where asset managers allow proxy advisors to automatically vote investors’ shares on their behalf with little or no analysis of the proxy firms’ recommendations. Robo-voting is a significant issue for companies given the speed in which votes are cast and the number of asset managers who engage in this practice, leaving little or no time for companies to address errors or incomplete information in recommendations — meaning that voting decisions are made automatically without taking this important information into account. For instance, a survey of companies found that 20 percent of shareholder votes are cast within three days of an adverse recommendation and proxy voting analysis found that 175 asset managers worth $1.3 trillion in assets voted with ISS 95 percent of the time. A separate study from an academic at Ohio State University further confirmed that nearly 100 investors voted with ISS 99.5 percent of the time on over 6 million shareholder resolutions.
As the SEC works to finalize their proposal on proxy advisors, they should take an additional step of requiring proxy firms to disable robo-voting on contested matters where there is a disagreement between the company and the proxy advisors. This would give asset managers the opportunity to review issues and consider the company response before making an informed voting decision, which would put them in compliance with their duty as an investment adviser. Ultimately, a targeted prohibition on robo-voting on these contested and controversial issues will ensure that investors’ shares are managed in an informed and effective manner.
The SEC should diligently finalize their proposal on proxy advisors to promote transparency and accuracy in the proxy process, as well as take steps that will require asset managers to truly look out for their clients’ best interests when voting for them on shareholder proposals. The current proposal would improve the information available to investors; hopefully the final rule takes additional steps on robo-voting to ensure investors review the information to act in their clients’ best interest.
Timothy Doyle is Principal and General Counsel at Guidepost Strategies and previously served as Vice President of Policy and General Counsel at the American Council on Capital Formation, where he managed a broad range of public policy and legal analysis on topics including the proxy advisory sector.
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