As discussed in this PubCo post and this PubCo post, the role of proxy advisory firms has once again risen to the forefront as a sizzling corporate governance topic, just in time for the SEC Proxy Roundtable on November 15. In advance of the event, interested parties are marshalling their arguments and beginning to present their cases.

In his announcement regarding the proposed proxy roundtable, SEC Chair Jay Clayton raised a number of potential topics, proxy advisory firms among them. More specifically, the Chair suggested as questions for consideration, whether investment advisers and others rely excessively on proxy advisory firms for information aggregation and voting recommendations; whether issuers are allowed a fair shot at raising concerns about recommendations, especially about errors and incomplete or outdated information on which a recommendation is based; whether proxy advisory firm’s voting policies and procedures are sufficiently transparent; whether comparisons of recommendations across similarly situated companies have value; whether any conflicts of interest (e.g., consulting services) are adequately disclosed and mitigated; whether proxy advisory firms should be regulated; and whether prior staff guidance about investment advisers’ responsibilities in voting client proxies and retaining proxy advisory firms should be modified. (As to the last point, that guidance was modified in part by the staff’s withdrawal of two infamous no-action letters. See this PubCo post.) Similarly, at a recent meeting of the SEC’s Investor Advisory Committee, the topic of proxy advisors was also raised by participants who questioned whether, in light of the number of institutions that outsourced their voting decisions, proxy advisory firms had undue influence over the proxy process and whether proxy advisory firms provided equal access to companies and investors.

However, on the other side of the debate is SEC Commissioner Robert Jackson, who, in a statement issued upon the withdrawal by the staff of the two no-action letters, maintained that the SEC recognizes the important role that proxy advisors play “in the shareholder-voting process, and today’s statements do nothing to change that.” More significantly, however, he feared that the SEC’s “efforts to fix corporate democracy will be stymied by misguided and controversial efforts to regulate proxy advisors.” In effect, he was concerned that the recent renewed focus on regulating proxy advisors was a shiny object that might well deflect attention from the serious problems affecting the corporate voting system. In Jackson’s view, the push to regulate proxy advisors has been driven largely by

“corporate lobbyists, who complain that advisors have too much power. There is, of course, little proof of that proposition, and the empirical work that’s been done in the area makes clear that that claim is vastly overstated. Rigorous review of the evidence shows that lobbyists are observing correlation in advisor recommendations and vote outcomes and confusing it for causation, providing no basis for the policy changes they seek. More generally, it’s hard to imagine that, upon a survey of all the problems that plague corporate America today, the Commission could conclude that investors receiving too much advice about how to vote their shares—advice they are free to, and often do, disregard—should be at the top of our list. In fact, the lack of competition among proxy-advisory firms is itself reason for pause, as regulation in the area risks further deepening the moat around the existing players—empowering the very firms that, some worry, already have too much influence.”

Finally, he reiterated his plea “not to allow corporate lobbyists’ priorities to sidetrack our important work in fixing the American system for corporate voting.” (See this PubCo post.)

A case for reform of the proxy advisory industry is presented in this 2018 proxy season survey from Nasdaq and the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness. There, they observe that ISS and Glass Lewis control 97% of the industry, making them “de facto standard setters for corporate governance in the U.S.” However, they argue, they are plagued by conflicts of interest that affect their objectivity, adopt a one-size-fits-all approach, are unwilling to “constructively engage with issuers, particularly small and midsize issuers that are disproportionately impacted by proxy advisory firms,” lack transparency regarding the development of recommendations, and are prone to making analytical errors but unwilling to address them. These problems, they contend, are “often cited as a challenge to the willingness of businesses to go and stay public.” Regulators and legislators have taken some initial steps in overseeing the proxy advisory firms, but, they argue, more reform is needed.

CCMC and Nasdaq conducted the survey during the 2018 proxy season, this year including responses from 165 companies. The theme, they contend is that there have been few improvements: “Companies are bringing more issues to the attention of proxy advisory firms, but they still find it difficult to engage in constructive discussions that lead to better informed voting recommendations. Conflicts of interest still pervade the industry, and many report a lack of transparency into how recommendations are developed.” Moreover, they advise, 97% of companies surveyed support the Corporate Governance Reform and Transparency Act, H.R. 4015, which passed the House, but has not yet passed the Senate. The bill would require proxy advisory firms to register with the SEC, to make prescribed disclosures, to allow companies to comment on recommendations, to designate an ombudsman, to maintain adequate staffing, to publicly disclose their methodologies for the formulation of proxy voting policies and voting recommendations, and to identify any potential or actual conflicts of interest.

The survey results showed that:

  • 92% of companies surveyed had an issue in their proxy statements that was the subject of a proxy advisory firm recommendation;
  • 83% say that they carefully monitor proxy advisory firm recommendations for accuracy or stale information;
  • 21% formally requested previews of recommendations, but were accommodated only 44% of the time; 38% asked to provide input both before and after final recommendations and were typically given one to two days to respond, with a range of 30-60 minutes to two weeks;
  • 39% “believed that the proxy advisory firms carefully researched and took into account all relevant aspects of the particular issue on which it provided advice, up from 35% in 2017”;
  • 29% sought to meet with proxy advisory firms on proxy proposals, although the request was denied in 57% of the cases, with all reporting “mixed results” from meetings;
  • 26% notified the proxy advisory firm and portfolio managers when they believed they were not adequately heard with regard to a proposed recommendation;
  • 46% notified portfolio managers and/or the SEC when they believed the data used to make a recommendation was inaccurate or stale, although new reports were rarely issued;
  • 39% “advised proxy advisory firms and their clients if specific recommendations did not advance the economic best interests of shareholders”; and
  • several companies reported that 10% to 15% (or, alternatively, 25% to 30%) of their shares would be “robo-voted,” where a company’s outstanding shares are voted automatically in line with an ISS or Glass Lewis recommendation in the 24-hour period after the recommendation; and
  • 10% identified significant conflicts of interest at proxy advisory firms, and 21% of those alerted the proxy advisor. Notably, some companies said that they were “approached by ISS’ consulting arm soon after a negative recommendation was issued.”

On the other side of the issue is Protect the Voice of Shareholders, a new joint project of ISS and the Council of Institutional Investors formed to lobby against H.R. 4015 and “to correct the record” regarding proxy advisory firms. (Hat tip to blog.) The project devotes a page to separating “Myth vs. Fact,” which seeks to put right certain perceived “misinformation.” According to ISS and CII:

  • institutional investors are not legally required to engage proxy advisors, but instead voluntarily employ them because they see value in their services and products;
  • rather than being unaccountable, ISS “falls under the regulatory authority of the SEC, subject to an existing time-tested regulatory framework and SEC oversight”;
  • ISS is a registered investment adviser (as are two other proxy advisory firms) and has fiduciary duties to the investors that hire ISS;
  • institutional investors are almost universally opposed to H.R. 4015;
  • proxy advisors’ influence “is greatly exaggerated, confusing causation and correlation”; rather, independent research from proxy advisors is valued by investors, but the vote is controlled by the managers of the investors;
  • proxy advisory firms do not submit shareholder proposals or control shareholder meeting agendas; accordingly, they do not “push a social and environmental agenda”;
  • the methodologies of proxy advisors are not black boxes; some methodologies are custom-designed for specific clients, while other are based solely on public information;
  • ISS discloses all real and perceived conflicts of interest to its clients and has a significant relationship disclosure policy;
  • H.R. 4015 would stifle competition by imposing burdensome regulations, forcing smaller firms out of the market;
  • the SEC’s withdrawal of the two no-action letters did not change the law or the approach institutions must take in performing due diligence on proxy advisors; and
  • proxy advisors do no provide cookie-cutter advice, but rather “are hired to provide data, research and analysis, and vote recommendations—specific to clients’ proxy voting policy positions—so that the clients can implement their own proxy voting and corporate governance philosophies.”


The extent of influence of proxy advisory firms over their institutional clients has been a topic of some debate, largely because it is difficult to measure how institutional investors, given the same facts, would have voted in the absence of proxy advisors’ recommendations, i.e., the confusion between causation and correlation. Nevertheless, The Big Thumb on the Scale: An Overview of the Proxy Advisory Industry, from Stanford’s Rock Center for Corporate Governance, contends that proxy advisors likely have a material, although unspecified, influence over voting behavior:

“An extensive sample of the voting records of 713 institutional investors in 2017 shows that institutional investors are significantly likely to vote in accordance with proxy advisor recommendations across a broad spectrum of governance issues. For example, 95 percent of institutional investors vote in favor of a company’s ‘say on pay’ proposal when ISS recommends a favorable vote while only 68 percent vote in favor when ISS is opposed (a difference of 27 percent). Similarly, equity plan proposals receive 17 percent more votes in favor; uncontested director elections receive 18 percent more votes in favor; and proxy contests 73 percent more votes in favor when ISS supports a measure. While the evidence shows that ISS is the more influential proxy advisory firm, Glass Lewis also has influence over voting outcomes. Glass Lewis favorable votes are associated with 16 percent, 12 percent, and 64 percent increases in institutional investor support for say on pay, equity plan, and proxy contest ballot measures ….Furthermore, some individual funds vote in near lock-step with ISS and Glass Lewis recommendations, correlations that suggest that the influence of these firms is substantial.”

The authors contend that an “extensive review of the empirical evidence shows that an against recommendation is associated with a reduction in the favorable vote count by 10 percent to 30 percent.” According to one study cited in the paper, based on a sample of over 1,300 companies in the S&P 1500, an unfavorable ISS recommendation on a management proposal (such as compensation, antitakeover protections, mergers, and other bylaw-related items) was associated with 13.6% to 20.6% fewer affirmative votes. Looking at the influence of proxy advisory firms on specific matters, the authors conclude, based on cited research, that these firms have a “modest influence” on uncontested elections of directors and a “moderate to large impact” on votes on say on pay and equity comp plans.

And it is not just shareholders that are influenced by proxy advisory firms; to win a favorable recommendation, the paper suggests, companies often make governance decisions to conform to proxy advisors’ policy guidelines, particularly on issues such as executive compensation and compensatory plan design. A 2012 survey showed that 72% of public companies “review the policies of a proxy advisory firm or engage with a proxy advisory firm to receive feedback and guidance on their proposed executive compensation plan.” And many companies implement changes in response, including changing disclosure practices, reducing certain benefits or changing the nature of benefits. The authors cite a study of equity comp plan design, which showed that companies tend to design their plans to fall just below ISS limitations. (See this PubCo post.