New Report: Proxy Advisory Firms Need Oversight

NEW YORK, NY (5/21/18) – Shareholders protect their economic interests in part by voting in corporate elections. Typically, shareholders exercise these voting rights by proxy; for publicly traded corporations in the U.S., ballot items are specified in proxy statements that must conform to rules promulgated by the Securities and Exchange Commission (SEC). Some of the matters considered in proxy voting are routine, while others have important implications for the control, strategic direction, and leadership of corporations, as well as the compensation and incentives offered to company executives.

A new report by James R. Copland, Senior Fellow at the Manhattan Institute, with David F. Larcker and Brian Tayan of Stanford University, looks at proxy advisory firms, which advise and significantly influence institutional investors on proxy voting matters. This report seeks to inform further the state of knowledge about proxy advisory firms with a comprehensive review of the best empirical evidence. The report shows that proxy advisory firms’ recommendations are generally harmful to shareholders’ interests but that a market failure prevents industry self-correction. Thus, new regulations might be required.

The report further finds that:

• Proxy advisory firms lack transparency. The leading proxy advisors do not publicly disclose how they develop their proprietary guidelines. They also do not disclose the results of any testing to demonstrate that their recommendations are accurate and lead to positive future outcomes for shareholders.
• Institutional investors are influenced by the recommendations of proxy advisory firms. Their influence is most significant in proxy contests, the approval of company-wide equity compensation plans, and executive compensation advisory (“say on pay”) voting.
• Corporations are influenced by proxy advisory guidelines. Corporations make governance decisions to increase the likelihood that they will receive a positive recommendation from these firms.
• Research generally shows that this influence is harmful to shareholders, with one notable exception: proxy advisory firm recommendations in deciding proxy contests (contested director elections involving control of the corporation) are shown to be beneficial to shareholders.

The report argues that the government could reduce the regulatory demand for proxy advisory services by eliminating the requirement that institutional investors vote all items on the proxy. In addition, the government could improve advisory firms’ accuracy, transparency, and accountability through a series of regulations, suggested in the report.

Click here to read the full report.