Private sector companies that provide advice to institutional shareholders on how to vote their shares
A proxy advisor is a company that advises investors on how to exercise the voting rights attached to their shareholdings in listed companies. Proxy advisors also often handle the actual mechanics of the voting process, and may provide research services.
The proxy advisory business began in the United States (where a proxy is what in the United Kingdom is a shareholder vote). The rationale of the proxy advisory business is that the large number of listed public companies in the US makes it impossible for an institutional investor – which may have shareholdings and hence voting rights in hundreds of companies – to monitor all of those companies and to give sufficient consideration to how the shares that they manage should be voted. A proxy advisor will provide advice on how those votes should be exercised and may also take voting decisions on behalf of their institutional investor clients.
The consequence is that proxy advisors play an increasingly important role in corporate governance. Delaware Vice-Chancellor Leo Strine observed that:
“…CEOs come on bended knee to Rockville, Maryland, where ISS resides, to persuade the managers of ISS of the merits of their views about issues like proposed mergers, executive compensation, and poison pills. They do so because the CEOs recognize that some institutional investors will simply follow ISS’s advice rather than do any thinking of their own.”*
ISS (Institutional Shareholder Services, a division of RiskMetrics Group) is a leading proxy advisor; as is Glass, Lewis.
Concerns about proxy advisors
Given the influence that proxy advisors have over the outcome of shareholder votes, various concerns have been raised about their role:
- Power without responsibility: Proxy advisors advise on how votes should be cast (or actually cast those votes on behalf of clients) but have no ownership interest in the outcome of the vote.
- Conflicts of interest: Proxy advisors may provide consulting and other services to the companies on which they are making voting judgements; there is obvious potential for proxy advisors to advise their clients to vote as the company recommends.
- Methodology: With thousands of resolutions and reports to assess, the advisory process may be reduced to a tick-box approach where a common template is applied to all firms, with little judgement applied to the individual circumstances of each company being assessed.
These concerns have been reflected in the increased attention paid to proxy advisors by the US Securities and Exchange Commission (the SEC), which in 2010 began to consult on whether advisors should be regulated by the SEC.
Proxy advisors in the United Kingdom
The proxy advisory business is less well-established in the UK (although firms such as PIRC and Manifest provide the service). This is partly because there is less demand for their services, as the smaller universe of listed companies means it is less difficult for investment managers to take a view on company resolutions, and also because the advice provided by proxy advisors has, to an extent, been provided by industry bodies such as the Association of British Insurers.
The increased stress on the importance of engaged ownership by institutional investors in the UK, epitomised by the Financial Reporting Council’s Stewardship Code, may also result in less demand for proxy advisory services – although some investment managers who historically have not engaged on governance issues may turn to proxy advisors now that they are under increased pressure to be seen to be involved in shareholder decisions.
*Quoted in “The Power of Proxy Advisors: Myth or Reality?” by S. Choi, J. Fisch and M. Kahan, Institute for Law and Economics, Research Paper No.10-24.
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