Proxy advisers: proposed US regulations are misguided
May 29, 2019
Proxy advisers, such as Institutional Shareholder Services (ISS), review company disclosures and provide cost-effective, independent research and voting recommendations to institutional investors, using the investors’ own voting guidelines. This enables resource-constrained investors to cover hundreds, if not thousands, of companies and to engage with each as necessary to protect their investments.
Certain companies have criticised the increasing influence of proxy advisers, claiming that they are not fair, lack transparency, do not understand the company and are difficult to engage with. In response, the US Congress has proposed legislation to require the advisers to register with the Securities and Exchange Commission (SEC) and to subject themselves to audits for conflicts of interest.
However, does it make sense to regulate organisations that provide voting recommendations to shareholders cost effectively? The power of proxy advisers may be overstated: research by Glass Lewis has found that their investor clients vote differently from their recommendations 37% of the time.
Farient recently examined Say on Pay (SOP) votes cast for S&P 500 companies by 1,200 institutional investors, testing the hypothesis that smaller investors, with fewer resources, are more likely to follow ISS’s voting recommendations. It found that:
• The largest 200 investors voted in line with the recommendations of ISS 84% of the time, while the smallest 200 investors voted with the recommendations 89% of the time.
• In contrast, looking at “AGAINST” recommendations only, larger investors are more likely to vote with ISS compared to smaller investors, 74% to 56% respectively.
• The top 20 investors, ranked by assets under management, vote very differently relative to ISS recommendations. For example, BlackRock voted in support of SOP resolutions 97% of the time, following ISS recommendations 90% of the time; while BNY Mellon voted in support of these resolutions 56% of the time, following ISS recommendations only 64% of the time
This evidence shows that institutional investors consult research by their proxy advisers to inform their voting decisions but in the end make up their own minds in casting their votes.
Farient, like MM&K, encourages its client companies to engage with their investors and proxy advisers, to help them to understand what is happening. Directors should tell the company’s story and provide a compelling narrative to ensure that proxy advisers do their jobs while the directors take the opportunity to explain that they are doing theirs.
For further information, contact Mike Landon.