In November 2019 the U.S. Securities and Exchange Commission (SEC) voted 3-2 in favor of proposing two new rules regarding proxy advisory firms. These rules, S7-22-19 Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice and S7-23-19 Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8 build on the SEC’s November 2019 interpretive release, which clarified that proxy advisory firms are subject to anti-fraud rules and outlined best practices investors can employ when utilizing proxy advisory services.
In our latest report, the Institute for Pension Fund Integrity (IPFI) has returned to this topic to assess the rulemaking process and the implications of these two rules, in particular. Proxy advisory firms play a critical role in determining how institutional investors, such as those who manage public pensions, vote on shareholder resolutions. As fiduciaries, these individuals are obligated to prioritize fiscal returns above all else. However, proxy advisory firms compromise that duty through several avenues, such as:
- Lack of transparency – Those interested in obtaining information on the basis of proxy voting recommendations will find it nearly impossible. Furthermore, proxy advisors provide a technological platform for fund managers to utilize. This encourages compliance with recommendations in a closed system, resulting in a practice of “robo-voting.” This phenomenon disenfranchises public pension plan members from having a say over how their own investment dollars are allocated.
- Conflicts of interest – Proxy advisory firms advise institutional investors on how to cast their votes. These firms also advise companies on how to obtain a more favorable score as awarded by the proxy advisory firm. Such a practice directly violates the Sarbanes-Oxley Act of 2002, which requires the separation of parts of financial institutions that provide ratings on companies and those that conduct advisory work for those same companies.
- Politically-motivated voting – In addition to the Taft-Hartley voting guidelines, which prioritize financial returns, proxy firms deploy a range of specialty reports to inform institutional investors on how to vote, including socially responsible, faith-based, and sustainability guidelines. These guidelines allow for third parties to hijack pension funds in an attempt to advance arbitrary political or social causes while providing cover for the proxy advisory firms who have been entrusted with providing independent recommendations. Recommendations that give weight to any of the above considerations are far from independent.
- Outsized and Unwieldy Influence – Institutional Shareholder Services Inc. and Glass Lewis Co. control 97% of the market. The voting policies of these firms have become so enormous that corporations have adopted a practice of tailoring their policies in advance to avoid lengthy “vote no” campaigns.
IPFI President Christopher Burnham wrote in Forbes, “These firms advise pension plans on how to vote on a variety of corporate issues that impact returns, sometimes with a focus on ‘impact investing,’ meaning they are also advocating for a specific political agenda… Our public plans, politicized, mismanaged and underfunded are a time bomb ticking away.”
IPFI maintains that investment advisers must place the financial considerations above any other factor. The necessity of introducing appropriate proxy reform to a seriously lacking regulatory scheme is apparent. While illuminating the major flaws that need addressing, we hope that this report serves as an accessible reference to public pension plan members when advocating for an unwavering commitment to fiduciary responsibility. No public servant should have to worry about their retirements after a lifetime of contributions.
Read the latest issue brief, SEC Rulemaking and What It Means for Proxy Advisory Firms.