Congress has moved closer to potentially reforming the proxy advisory business, with advocates and opponents of change gearing up for battle.
The House of Representatives on December 20 voted to support the Corporate Governance Reform and Transparency Act. It has since been passed to the Senate’s committee on banking, housing and urban affairs, where it will need to be debated and, if approved, passed to the full Senate for a vote.
The bill would require proxy advisory firms to register with the SEC, provide issuers with a review of their reports before they’re sent to investors and appoint an ombudsman to receive complaints about any inaccuracies in those reports.
The National Investor Relations Institute (NIRI), Society for Corporate Governance, Nasdaq and the NYSE are among those that have expressed support for the legislation.
In a letter to the SEC last summer, NIRI chief executive and president Gary LaBranche raised concerns about proxy advisers’ use of automated systems to cast votes on behalf of their clients. ‘Proxy advisers have a valuable role that they fulfill, but we feel there should some checks and balances there,’ Ted Allen, NIRI’s vice president of strategic communications, told IR Magazine at the time.
ISS and Glass Lewis – which combined control 97 percent of the US proxy advisory market – are joined by the Council of Institutional Investors (CII) and the UN-backed Principles for Responsible Investing (PRI) in opposition to the bill.
The case for
Those in favor of proxy adviser reform suggest that the industry lacks transparency, is prone to inaccuracies in its reports and could be susceptible to conflicts of interest.
Investors hire proxy advisers to review a company’s proxy materials, assess them based on the investor’s voting guidelines and recommend whether the investor should vote for or against shareholder proposals.
Investors may have more portfolio companies that they can review during the busy proxy season, so proxy advisers use automated systems which can cast votes based on the investor’s voting guidelines, unless the investor specifically reads the proxy adviser’s report about an issuer.
A 2016 NIRI survey found that 87 percent of US-based IR practitioners feel that proxy advisers should be required to show their reports to issuers to check for inaccuracies, something that the bill creates provisions for.
‘NIRI is particularly encouraged that the bill includes a draft review mandate so that all US companies will have an opportunity to review draft proxy reports for factual accuracy before investors start voting,’ LaBranche tells IR Magazine.
The bill would also require proxy advisory firms to register with the SEC, meaning they would have to update the commission on their voting guidelines and recommendations and provide an annual report into the number of shareholder proposals they reviewed and made recommendations on. ISS is currently regulated as an investment adviser under the Investment Advisers Act of 1940.
Spokespeople for both Nasdaq and NYSE told IR Magazine that the legislation would make the public markets a more attractive proposition for companies – a stated goal of SEC chair Jay Clayton.
The case against
ISS and Glass Lewis both suggest that introducing a review process for issuers would remove the advisers’ impartiality.
‘By giving issuers a right to review proxy recommendations before they are published to clients, the legislation inappropriately and unnecessarily interferes with institutional investors’ voting processes, compromising their contractual right to an independent, unfiltered product,’ KT Rabin, CEO of Glass Lewis, tells IR Magazine.
In a letter to the House majority and minority leaders – sent before the House’s vote on the bill – Gary Retelny, president and CEO of ISS, said an issuer review period would give investors less time to assess proxy materials.
‘Given the already short time period between when companies issue their proxy materials and the shareholder meeting date, this draft review right would, in practice, severely limit institutional clients’ ability to receive, in a timely manner, the information that they need to make informed proxy voting decisions,’ Retelny wrote. ‘The requirements would also introduce additional costs to the process which would ultimately be borne by our clients and the underlying asset owners whom they represent.’
The PRI also cites compliance costs and concerns about objectivity as reasons to oppose the bill, according to a letter it sent to House Republican leadership.
The CII is another investor group that opposes the bill, saying in a November 9 letter to the House Committee on Financial Services that the legislation is ‘based on several false premises, including the erroneous conclusion that proxy advisory firms dictate proxy voting results.’ The letter was co-signed by 45 investors and investor groups, including CalPERS, CalSTRS and the New York City Comptroller.
In 2017, ISS recommended investors vote against issuer’s say-on-pay proposals at 11.92 percent of the Russell 3000, but only 1.28 percent of those proposals received less than majority support from shareholders, according to CII’s letter.
