Proxy Warfare

It’s tough being a proxy advisor: One minute, they’re providing shareholder voting recommendations, and the next, they’re being accused of operating a cartel.

The big proxy advisory firms — Institutional Shareholder Services and Glass Lewis — have come under fire from Congress, lobbying groups, and JPMorgan CEO Jamie Dimon. The Securities and Exchange Commission may also be considering ways to limit their power and influence. Just over a month ago, the House Subcommittee on Capital Markets held a hearing entitled: “Exposing the Proxy Advisory Cartel: How ISS & Glass Lewis Influence Markets.” Such firms, which provide consulting services to public companies, are widely used by mutual fund and exchange traded fund managers to provide proxy voting recommendations for investors. But Dimon, who has long been critical of the big proxy advisors, reportedly called them a “cancer,” according to Pensions & Investments. And there are at least six proposed bills in the House aimed at limiting proxy advisors’ power. 

Proxy Monopoly?

One of the founders of ISS, Nell Minow, who left the company in 1990 and is now chair of Value Edge Advisors, said the push against the big two proxy advisory firms is much ado about nothing. “ISS and Glass Lewis are in business. They are for-profit entities, and they ask their clients, ‘What do you want from us?’” Minnow said. “There is no possible way that anybody could object to them being too powerful. That’s a kill-the-messenger strategy.”

The campaign against proxy advisors is related to the widespread push against environmental, social, and governance criteria used in investment decision-making. Critics of proxy advisors have accused the firms of pressuring public companies to align themselves with progressive causes, including diversity, equity, and inclusion. And because the firms consult with public companies, they have an inherent conflict of interest, opponents have said. “Two firms — ISS and Glass Lewis — control 97% of the proxy advisory market. That concentration alone would warrant scrutiny,” Rep. Ann Wagner, R-Mo., said during the April hearing. “But more troubling is how their influence goes far beyond research — they now routinely dictate outcomes of shareholder votes.”

That point, Minow said, is actually something the corporate world should find appealing, as 96% of recommendations by ISS and Glass Lewis have been to vote with companies’ board recommendations. And even so, the results of shareholder votes are often nonbinding, and public companies sometimes ignore them, she said.

In response to the push against activist shareholder campaigns and ESG, several big asset managers have added programs that let fund investors direct how their shares are voted:

• BlackRock’s Voting Choice program applies to nearly half of the firm’s $6.3 trillion index equity assets.
• State Street’s proxy voting choice program includes 81% of its eligible index equity assets, or about $1.9 trillion.
• Vanguard’s Investor Choice option applies to $1 trillion in assets in equity index funds, and the company plans to expand it.

Limited Choice: “For a decade I’ve been saying that ISS is fundamentally conflicted — they make their money by selling data to corporations,” said Andy Behar, CEO of shareholder advocacy group As You Sow, noting that even the most left-leaning voting policy it provides sides with CEO pay and corporate boards about 80% of the time. People who opt for the sustainable voting policies offered by ISS and Glass Lewis “think they’re voting aligned with sustainability, but they’re not,” he said. “I don’t understand why the right is attacking them so hard.”