During the ongoing debate regarding whether new, harmful regulations should be placed on the proxy advisory industry, a number of factual inaccuracies have taken hold. Many of these inaccuracies stem from a masked effort or “Astroturfing” campaign by some public companies, where the true sponsors of a lobbying campaign are hidden. It has not been very well executed, however. In fact, it has been exposed by the New York Times, Bloomberg, Politico and others.
Nevertheless, some of the factual inaccuracies promulgated by this effort have taken hold in the public debate. These must be addressed.
While corporate special interests are on one side of this issue — supported by, among others, an industry funded group misleadingly called “Main Street Investors Coalition” — united in opposition to harmful new regulations are real investors like large public sector pension fund managers, the National Conference on Public Employee Retirement Systems, AFSCME and others. Many state treasurers and comptrollers are also opposed, along with the non-partisan and widely respected Consumer Federation of America.
With the SEC indicating its intentions to revisit proxy adviser reform soon, it’s important to set the record straight on the role of companies like Institutional Shareholder Services (ISS).
The U.S. investment system is structured in a way that enables workers to entrust their pensions, 401(k)s, IRAs, 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 governance matters while also voting at shareholders’ meetings on issues ranging from executive compensation 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 voting rights in an informed way on thousands of proxy issues.
The pro-regulation crowd is promoting a false narrative that proxy advisers wield outsized influence, and that investors blindly follow proxy advisers’ recommendations. In reality, our clients think for themselves and vote according to their own views on governance and proxy voting. Given that our proprietary 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.
Moreover, in 2018, 85 percent of ISS’ 100 largest clients utilized custom-designed proxy voting policies and more than three-quarters of all shares processed by ISS on behalf of clients were tied to client custom proxy voting policies.
It is also worth pointing out that ISS is not an anti-management or anti-corporate organization. To the contrary, the record shows that ISS overwhelmingly recommends in favor of public company management, which reflects a positive trend in public company governance.
The SEC’s Investor Advocate said it best in April, when he stated, “the simple fact of the matter seems to be that proxy advisers have given asset managers an efficient way to exercise much closer oversight of the companies in their portfolios, and those companies don’t like it. That’s understandable, and it is also understandable that companies, rather than directly asking the SEC to suppress shareholder voting or give companies more of a say in the advice that is given, would try to cloak their arguments under the mantle of investor protection. But the investors themselves — again, the ones paying for proxy advice — are not asking for protection. In fact, I keep hearing opposition from investors to proposals that might lead to interference in the proxy voting process.”
SEC Commissioner Robert Jackson called efforts to regulate proxy advisers “misguided” and noted this has “long been a top priority of corporate lobbyists.” Commissioner Jackson has also said that there is little proof that proxy advisers have too much power.
We are proud of the important role we play in assisting institutional investors as they, in turn, help Americans achieve their financial goals while mitigating portfolio risks. As the SEC continues to examine issues pertaining to the investment system and the role of its players, it’s important to sift through the rhetoric behind this manufactured crisis and allow for a meaningful, fact-based debate to take place.
Steven Friedman is ISS’ General Counsel. He oversees all legal matters, including corporate contracting, intellectual property, human resources, litigation and regulatory compliance.
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