Comment to the SEC in Support of Needed Reforms

Summary of Study

Bottom Line: Proposed regulations on proxy advisory firms will restore accountability and balance to proxy voting. They will address many of the longstanding problems plaguing proxy advisors, helping main street investors and securities markets in general. More comprehensive oversight of proxy advisory firms by the SEC is long overdue.

Despite being plagued by conflicts of interest, a lack of transparency, and significant errors in voting recommendations, proxy advisory firms continue to carry a significant amount of influence over corporate governance at America’s public companies. The two dominant proxy firms—Institutional Shareholder Services (ISS) and Glass Lewis—control roughly 97% of the proxy advisory industry, constituting a duopoly that has become the de facto standard setters for corporate governance in the U.S.

Proxy advisory firms have been criticized on several major issues, including:

  1. Rampant conflicts of interest that impact the objectivity of voting recommendations made to institutional investors.
  2. A one-size-fits-all approach to voting recommendations that ignores the unique characteristics and operations of individual companies and industries.
  3. A lack of willingness to constructively engage with issuers, particularly small and midsize issuers that are disproportionately impacted by proxy advisory firms.
  4. A lack of transparency throughout the research, methodology and development of voting recommendations.
  5. Frequent and significant errors in analysis and methodology as well as a persistent unwillingness to address those errors.
  6. Automatic voting procedures that compound mistakes and frustrate meaningful engagement with issuers.

These issues with the proxy advisory industry are often cited as one of the many challenges to the willingness of businesses to go and stay public, a trend which not only jeopardizes the growth prospects of businesses but also limits the investment opportunities for main street investors who depend on vibrant public markets to create and sustain wealth.

According to a Center for Capital Markets Competitiveness/Nasdaq survey of public companies, respondents noted that any attempts to correct factual errors or engage in substantive dialogue with proxy advisory firms were futile and a waste of effort. The survey also highlights the increasing awareness that issuers have regarding conflicts of interest at proxy advisory firms.

Despite owning no stock themselves, proxy advisors have become a force unto themselves in the capital markets, conflicted and accountable to no one. The paper supports the SEC rules that address proxy advisory excesses. These regulations will help align vote recommendations and proxy voting decisions with the economic interests of main street investors by providing enhanced disclosures and more useful information.

Access the full comment letter here.