SEC Rulemaking and What It Means for Proxy Advisory Firms

Summary of Study

Bottom Line: The SEC's proposed rules on proxy advisory firms fulfills three core objectives: inform and protect investors, enforce federal securities laws, and facilitate capital formation. The rules will also address four major problems with proxy advisory firms under the status quo: lack of transparency, conflicts of interest, politically-motivated voting, and outsized influence. The SEC should follow through on these proposals.

The SEC's proxy rules seek to limit the role of proxy advisory firms in two primary ways:

  1. Require proxy advisory firms to give companies two chances to review proxy voting materials before they are sent to shareholders. With two opportunities to review reports, companies would have a chance to point out inaccuracies or outdated assertions, overcoming widespread information inaccuracies in reports. The current timeframe within which investors cast their votes after receiving recommendations demonstrates that, in many cases, the recommendations are not being carefully subjected to the tenants of fiduciary responsibility which demands a thorough level of due diligence on the investor’s part.
  2. Mandate an increase in the resubmission thresholds for motions, such as those related to environmental, social, and governance (ESG) ordinances, that shareholders file at companies. Under current provisions, shareholder resolutions must gain 3%, 6%, and then 10% approval over three successive years to meet a passing verdict. The latest proposed rule suggests increasing those percentages to 6%, 10%, then 30% over three successive years. Shareholder resolutions introduce rules and guidance that have the potential to impact a company’s bottom line. When resolutions become a vehicle for activist investing or other stipulations that threaten a company’s profits, proxy advisors are the ones who award their approval--not the plan members who are directly affected by the outcome.

The proposed rules stand to correct four major problems related to proxy advisory firms that compromise the shareholder voting process, and therefore company performance and financial returns on public pension investments: 

  1. Lack of transparency - Those interested in obtaining information on the basis of proxy voting recommendations will find it nearly impossible.
  2. Conflicts of interest - Proxy advisory firms advise institutional investors on how to cast their votes, while also advising companies on how to obtain a more favorable score as awarded by the proxy advisory firm.
  3. Politically-motivated voting - Proxy firms deploy a range of specialty reports to inform institutional investors on how to vote, including socially responsible, faith-based, and sustainability guidelines.
  4. Outsized influence - Institutional Shareholder Services Inc. and Glass Lewis Co. control 97% of the market.

Read the full issue brief here