Piwowar says industry has become a ‘duopoly’ with excessive influence
The proxy advisory industry in the US has turned into a ‘duopoly’ that exerts excessive influence on the proxy voting process, says Michael Piwowar, a commissioner with the SEC.
Speaking to an SEC-hosted roundtable on proxy advisory services, the Republican commissioner added that the dominance of two firms in the proxy advisory industry has acted as a barrier to entry by new firms with differing approaches or opinions.
‘I have become increasingly concerned that proxy advisory firms may exercise outsized influence on shareholder voting,’ Piwowar told panelists. ‘As an economist, my concern is heightened by the lack of competition in the proxy advisory market, which appears to be a stable duopoly preserved by near-impenetrable barriers for new entrants.’
A report submitted to Congress earlier this year shows that 97 percent of the proxy advisory business is controlled by ISS and Glass Lewis. A Stanford University study also concludes that the influence of proxy advisers over the market is on the rise, as is share ownership of institutional investors ‒ the advisers’ main clients ‒ which own around 75 percent of all shares in the US.
‘In addition to the lack of competition in this market, I am concerned by the potential over-reliance on proxy advisory firms,’ Piwowar continued. ’I see many similarities between the current situation with proxy advisory firms and the pre-crisis situation with credit rating agencies, including an unhealthy over-reliance on their recommendations by investors.’
Earlier this week, SEC commissioner Daniel Gallagher also gave a speech in which he raised concern about the ‘outsized influence’ of proxy advisory firms. ‘The SEC has been concerned about the role of proxy advisers for some time,’ he said.
Gallagher has repeatedly called for greater oversight of the industry, pointing out that regulators and other authorities in Europe, Canada, Australia and other areas have also started paying greater attention to the role of proxy advisory firms. ‘Increased calls for a review of the role of proxy advisers have come from a wide range of parties, including Congress, academia, the media and a national securities exchange,’ he said on December 3 at the Europe-sponsored Transatlantic Corporate Governance Dialogue conference in Washington, DC.
In October NASDAQ OMX sent a letter to the SEC asking the commission to require proxy advisory firms to disclose the formula and models they use to arrive at their recommendations, as well as any relationships that could result in a potential conflict of interest.
