A close evaluation of proxy advisors’ influence reveals trillions of dollars in ordinary funds could become fodder for activist investors
NEW YORK, NY – Last summer, the Securities and Exchange Commission (SEC) adopted a Proxy Advisor Rule, setting clear principles for institutional investors who use proxy advisory firms to engage in “robovoting.” While the robovoting trend had already been subsiding following guidance released in 2019, robovoters still maintained assets totaling more than $5 trillion as of 2020. With robovoting still in practice, it is worth evaluating the consequences shareholders—and the rest of the country by extension—face when institutional investors mechanically outsource voting decisions to proxy advisors.
In a new Manhattan Institute report, Paul Rose of the Moritz College of Law at The Ohio State University quantifies the upshot, providing a keen empirical overview of robovoting’s effects. He marshals recent scholarship to suggest that two advisory firms, Institutional Shareholder Services (ISS) and Glass Lewis, exercise outsized influence over corporate voting outcomes, and that their advice tends to particularly sway behavioral shifts among investors away from shareholder wealth maximation. But alongside that scholarship, Rose brings new data from the 2020 proxy season to quantify the number of robovoting investors. Reviewing how these investors disclose their use of proxy advisors to their clients, he finds that some potentially mislead shareholders with claims of independent review while acting in full alignment with proxy advice.
Rose’s discussion of the 2019 SEC guidance and 2020 rulemaking demonstrates some of the shortfalls of the regulations, particularly raising concerns over their ability to promote transparency and support shareholder interests in a highly concentrated market consisting overwhelmingly of influence from ISS and Glass Lewis. He explains that the implications of such a market have profound consequences for both regulators and shareholders. Rose concludes that regulators will need to carefully consider further action while institutional investors should update policies in light of recent SEC guidelines to prioritize shareholders’ interests. The clients of institutional investors— the Main Street investors who are the ultimate beneficiaries of fiduciary shareholder voting obligations— deserve full and fair information on how institutional investors are using proxy advisory services, including through robovoting practices.