Case for Proxy Reform Glaringly Evident After Latest Debate

On January 27, the Bipartisan Policy Center hosted a discussion on the SEC’s proposed reforms to the proxy voting process. Tom Quaadman, Executive Vice President of the U.S. Chamber Center for Capital Markets Competitiveness and Pat McGurn, Special Counsel and Head of Strategic Research and Analysis at Institutional Shareholder Services examined the key elements of the proposed reforms and debated their ramifications before an audience that IPFI was privileged to be a part of. 

Mr. Quaadman spoke to how the proposed rule addressed widespread concerns around accuracy, conflicts of interest, and the need for more transparency. Specifically, he cited the 2.5% error rate in proxy reports on companies, which he partially attributes to a lack of communication between proxy advisory firms and companies. Since the 2014 SEC-issued guidance on proxy advisory firms, an annual survey revealed that the level of company-initiated interactions with proxy advisory firms has been steadily declining due to the inability to correct factual errors promptly.  Quaadman added, “A financial analyst who doesn’t interact with the company and just makes industry-wide pronouncements isn’t going to last five minutes on Wall Street.” 

The discussion later turned to automatic voting, or robo-voting as it is commonly known. Quaadman referred to the observation that at least a third of the vote coming in within the first 48 hours, with 95% of those votes following the proxy advisory recommendations. McGurn swiftly noted that the majority of ISS’ client recommendations are based on custom reports tailored to that client. But, by ISS protocol, the term ‘custom’ may indicate a configuration as simple as, “vote in-line with ISS on everything except X.” Unquestioningly following recommendations save for one factor is an insufficient deployment of fiduciary duty. 

Finally, the two keynote speakers explored how conflicts of interest may arise. Mr. McGurn argued the SEC’s reforms compromised the integrity of the firewall between consulting and proxy voting firms. Calling this firewall “leaky” Quuadman pointed to the fact that many companies who receive poor recommendations from proxy advisors are soon after contacted by their colleagues on the consulting side of the business. In other words, their proxy recommendations in some cases can be confused as business development. Quaadman also reminded the audience that proxy firms do not publicly disclose if shareholder or director slate proponents are clients.

ISS clients cast 8.5 million ballots and 3.8 trillion shares annually. Under the current arrangement, rife with factual errors, robo-voting, and conflicts of interest, ISS and Glass Lewis operate as “de-facto standard setter[s] in corporate governance.” The prevailing argument against SEC regulation maintains that it’s simply not necessary. 

McGurn failed to provide any examples to alleviate concerns raised about ISS’ violation of fiduciary duty, need for greater transparency, and their clear conflicts of interest. The discussion summarized here demonstrates that the proposed rules are not only necessary but integral to the performance of our markets and the safeguarding of America’s public servants’ future retirements.