In this post on proxy advisors in June 2011 we described what a proxy advisor is, and discussed the prominence of proxy advisors in the US corporate governance model and the much more limited role they play in the UK. We also remarked on the concerns in the US on the power of proxy advisors such as Institutional Shareholder Services Inc., as expressed by Delaware Vice-Chancellor Leo Strine:
“…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.”*
The formulaic way in which some proxy advisors may approach deciding and advising on how votes should be cast on resolutions at shareholder meetings is illustrated by the ISS 2012 US Proxy Voting Summary Guidelines, which were issued by ISS at the end of 2011. These set out how votes should be cast on almost every conceivable resolution, from the mainstream – such as voting on director nominees and common stock authorisations – to greenmail, genetically modified ingredients, recycling and water issues.
As we observed in June 2011, “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” – whilst also acknowledging the rationale for the use of proxy advisors:
“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.”
See here for developments on how the SEC may regulate proxy advisors.
*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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