Proxy voting rules in the US have shifted too much power to the two top proxy advisory firms, allow mutual funds and other investors to dodge their responsibilities as corporate stewards, and are harming shareholders, according to a report by SEC adviser James Glassman and JW Verret, a professor at the Mercatus Center Working Group on Financial Markets.
Regulations approved in 2003 that require mutual fund shareholders to disclose their policies for proxy voting have prompted them to outsource much of their decision making to proxy advisory firms, mainly ISS and Glass Lewis, which ‘have come to dominate not just the field of proxy advice but also the landscape of corporate governance in America,’ the report states.
‘Now that mutual fund shareholders are required to vote on all proxies, the simple solution is to hire an adviser and enjoy virtual immunity from liability if they follow these advisers’ recommendations,’ notes the report. ‘Proxy voting by institutions has become increasingly important in determining how American businesses are run, both because those institutions now hold three quarters of the equity assets of the 1,000 largest public corporations and because shareholder activism has increased, with the encouragement of government.’
Glassman, a member of the SEC Investor Advisory Board and former Under Secretary of State for Public Diplomacy and Public Affairs, is also executive director of the conservative George W Bush Institute in Dallas. Verret, a former associate in the SEC enforcement defense practice group, is a senior scholar at the anti-regulatory Mercatus Center at George Mason University.
The two recommend that the SEC limit the voting requirements on mutual funds and pension funds so they can decide when to vote, end any preferential treatment given to proxy advisory firms, and end proxy requirements such as say-on-pay votes.
Earlier this year, research into the power of the proxy advisory industry by the European Securities and Markets Authority (ESMA) prompted the regulator to rule the industry doesn’t need to be governed by binding regulations, but should self-regulate behavior in areas such as transparency and disclosure.
Glass Lewis, in a letter to ESMA during the research, said the power of proxy advisory firms is ‘overstated’ and that clients often vote along with the advisory firms’ recommendations because they have reached similar conclusions through independent research.
‘More than 80 percent of Glass Lewis’ 900 clients – including the majority of the world’s largest public pension funds, asset managers and mutual funds – vote according to a custom policy or via a custom process for reaching vote decisions [that] often result in votes in line with Glass Lewis’ recommendations for the same or different reasons,’ Glass Lewis writes.
