Why Proxy advisers are losing their power

Annual general meetings (agms) of shareholders used to be dull affairs. A company’s owners would gather to elect board members or, after the global financial crisis of 2007-09 exposed the gulf between fat-cat bosses and their workers, cast (mostly non-binding) votes on executive compensation. In the past few years, though, they have turned into corporate confessionals, with nothing short of a company’s soul at stake. Motions are proliferating on decarbonisation and diversity targets, political donations, workers’ rights and much else besides. A record 592 environmental and social proposals were filed in America ahead of this year’s agm season, which spans May and June. In the 20 years from Amazon’s initial public offering in 1997, the e-empire’s shareholders voted on 22 resolutions brought by fellow investors. At the latest agm on May 25th they were asked to weigh in on 14. How can the harried fund manager keep track?

Enter proxy-advisory firms, hired by investors to sift through the resolutions and make recommendations on which boxes to cross. There may be no monopoly in the market for ideas, but when it comes to proxy advice the market is a cosy duopoly. Institutional Shareholder Services (iss) and Glass Lewis meet more than 90% of the demand for such counsel in America.

The pronouncements of these corporate philosopher-kings grew in prominence after 2003, when new rules required American institutional investors to disclose their voting polices. For most investors it is cheaper instead to outsource the task to iss or Glass Lewis. The work is lucrative. In 2021 iss, which has annual revenues in excess of $250m, was bought by Deutsche Börse, a German exchange operator, for $2.3bn. The same year two Canadian public pension funds sold Glass Lewis to a private-equity firm.

The duo’s recommendations carry weight. One study identified 114 institutional investors, representing more than $5trn in assets under management, who “robovoted” in lockstep with either iss or Glass Lewis during the 2020 proxy season, mechanically deferring to their recommendations. It is difficult to tell how a shareholder would have voted but for a proxy recommendation. Still, the advisers have almost certainly moved the needle in some important shareholder votes (and in plenty of unimportant ones, too). They have also wielded a softer power, moulding the ever-changing norms of corporate governance through changes in their voting policies and other public displays of wisdom. No press coverage of an important agm is nowadays complete without a nod to their stance, as when the media leapt on iss’s recommendations that dissented from Amazon management’s guidance on nine issues, from executive pay to human-rights due diligence, plastic use and gender and racial pay gaps.

As shareholders’ concerns expand from narrow profits to broader “purpose”, you would expect the advisers to be enjoying a golden age. In fact, their proxy power may start to decline, for three reasons. The first is structural. In the past decade share ownership in America has become ever more concentrated in the hands of giant asset managers such as BlackRock, State Street and Vanguard. These behemoths run their own departments of corporate-governance consigliere and so have little need for the proxy advisers’ services. In 2008 the trio between them owned 13.5% of the average company in the s&p 500 index of big American firms, according to Bloomberg, a data firm. They now hold nearly a quarter. In May BlackRock struck a cautionary note on environmental and social resolutions, noting that these were becoming prescriptive to the point of micro-management. Smaller institutional investors may prefer to side with their bigger peers rather than the proxy firms in such matters, especially if the concentration of ownership continues to rise.

Second, managements are putting up a fight. This year’s votes are still being tallied, but environmental and social resolutions have not had the knock-out run their backers expected, in part because companies that were caught off guard last year got their act together. On May 27th Twitter went further, announcing in a regulatory filing that it would ignore a shareholder vote which booted Egon Durban, a billionaire tech dealmaker, off the social-media firm’s board, citing the influence of proxy advisers on the result. iss had recommended evicting Mr Durban because he sits on six other public-company boards. That makes him “overboarded” in iss’s eyes. Twitter retorted that Mr Durban is a “highly effective member” with “unparalleled operational knowledge”. Merely sitting on more boards than the iss likes should not automatically disqualify him, the company implied.

In 2019, 319 companies signed a letter chastising a lack of transparency and accuracy in proxy advisers’ recommendations and calling for regulatory action. Soon afterwards the Securities and Exchange Commission (sec), which had dithered for years, finally began to rein in the proxy firms—the third challenge to their role. In 2020 the sec adopted new rules requiring increased disclosure of potential conflicts and open channels of communication between proxy advisers and companies. Last November the agency’s current head, Gary Gensler, watered down some of those amended rules, for example removing the requirement that proxy advice be sent to the management allowing it to respond. But they remain less proxy-friendly than in the past.

Annual general mayhem

Clashes pitting the proxy advisers against big investors, management and regulators look poised to intensify—all the more so if, as seems likely, agms continue to be a venue for some investors to push their politics. Asking two opaque firms, supposedly in the name of transparency, in effect to nominate America Inc’s boards of directors was dubious enough. Trusting them to resolve the complex trade-offs at the heart of 21st-century capitalism would be a travesty. ■

Read more from Schumpeter, our columnist on global business:
BASF’s plan to wean itself off cheap Russian gas comes with pitfalls (May 28th)
Why America’s clean-energy industry is stuck (May 21st)
Activist investors are becoming tamer (May 14th)

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