The U.S. Chamber of Commerce Center for Capital Markets Competitiveness (CCMC) and Nasdaq’s fifth annual proxy survey, released Nov. 21, demonstrates public companies are concerned about inaccurate information and conflicts of interest in proxy advisory firms. In fact, according to the survey, in 2019, 19 percent of respondents identified significant conflicts of interest at proxy advisory firms—up from just 10 percent last year.

“Proxy advisory firms have been able to operate without oversight or transparency for too long,” said Tom Quaadman, executive vice president at the CCMC, when the survey was released. “We believe this has degraded the quality of information investors need to make informed voting decisions.”

Conflicts, faulty information, and robo-votes

Institutional Shareholder Services (ISS) and Glass Lewis control 97 percent of the proxy advisory industry, according to the survey. Of the 172 companies that participated in the poll, 58 percent reported they had been approached by the corporate consulting side of ISS in the same year their company received a negative vote recommendation. Eight-seven percent of the companies surveyed had a proxy advisory firm make a recommendation on an issue included in their proxy statements.

Of the companies that found significant conflicts of interest at proxy advisory firms, just 8 percent brought them to the attention of proxy advisory firms. And only 39 percent of companies believe proxy advisory firms carefully researched and took into account all pertinent aspects of a given issue on which the proxy advisory firm provided advice.

“Proxy advisory firms have been able to operate without oversight or transparency for too long. We believe this has degraded the quality of information investors need to make informed voting decisions.” 

Tom Quaadman, Executive Vice President, CCMC

Companies reported that if they made a request to provide input before or after a proxy advisory firm’s recommendation was finalized, the companies were often given just a day or two to respond—and sometimes they were only given hours to provide input.

And the number of companies that have gotten shot down when requesting to meet with proxy advisory firms on shareholder issues has steadily climbed in the past three years. The survey notes requests for a meeting were denied 60 percent of the time in 2019, up from 57 percent in 2018 and 38 percent in 2017.

When corporations found vote recommendations they thought were based on inaccurate or out-of-date information, they let proxy advisory firms, portfolio managers, and/or Securities and Exchange Commission staff know 41 percent of the time.

Corporations also reported a large percentage of shares were robo-voted within 24 to 48 hours of the time an ISS or Glass Lewis vote recommendation was released.

The SEC has noticed

For more than a decade, proxy battles have been “an increasingly expensive distraction for public companies,” said Nasdaq Vice Chairman Ed Knight when the survey was issued. “A transparent, accurate, and verifiable proxy system that is oriented toward long-term value creation is vital to constructive shareholder engagement and the successful operation of public companies.”

The Chamber/Nasdaq survey “will help inform ongoing reform efforts” at the SEC, said Quaadman. “We look forward to working with the SEC and policymakers to improve transparency, accuracy, and relevancy of proxy advisory recommendations.”

On Nov. 5, the SEC voted to propose amendments to rules governing proxy solicitations to improve disclosures about conflicts of interest that proxy advisory firms provide to their clients. The rules, if finalized, would also give companies the opportunity to review and provide feedback when they identify errors in proxy voting advice.

The proposed rules “recognize the important role proxy voting advice businesses play in our markets and would benefit our Main Street investors—who, more and more, invest through funds where the asset managers rely on the advice, services, and reports of proxy voting advice businesses,” said SEC Chairman Jay Clayton when the SEC OK’d the proposal.

Earlier this year, the SEC issued proxy adviser guidance explaining expert proxy voting advice given at the request of investors is subject to the requirements for proxy solicitation under the Securities Exchange Act of 1934. In October, ISS filed a lawsuit in federal court in Washington D.C. seeking to have the guidance set aside.

A proxy advice firm’s point of view

Asked for a response to the survey’s results, Subodh Mishra, executive director of communications at ISS, said that “as a Registered Investment Adviser, ISS takes fiduciary duty of loyalty very seriously and has developed a comprehensive program to manage potential conflicts of interest as required by the Advisers Act and related SEC rules.”

Mishra noted ISS Corporate Solutions, or ICS, is a “wholly owned subsidiary of ISS” that “provides governance data, analytics, and services to corporate issuer clients.” Even so, “ICS does not and cannot provide any client with any assurance as to how ISS will recommend with respect to the matters that appear on any client’s proxy statement,” Mishra said.

The Glass Lewis press team did not respond to a request for comment.

Lori Tripoli is a writer based in the greater New York City area who focuses on legal and regulatory issues.