We are always particularly disappointed when those who claim to be conservative, rhapsodizing about the purity of the free market and urging cutbacks in government regulation, become hypocrites when it comes to the very free market responses and corrections that are essential for the integrity of capitalism. That’s exactly what Jeff Patch has done in The Weekly Standard, arguing that we need government regulation of proxy advisory firms.
The average American who owns stock in a public company through a 401(k) or a brokerage account has likely never heard of Institutional Shareholder Services. The firm is perhaps the most influential proxy advisor, advising pension funds and other institutional investors how to vote on shareholder proposals. Nonetheless, the secretive firm holds a vast amount of influence over how public companies operate.
Let us point out again that proxy advisory firms publish reports no one has to buy and recommendations no one has to follow. Their clients find their analyses useful and are more likely to follow their recommendations to vote with management than the tiny fraction of recommendations to vote against. The average Americans who have a brokerage or 401(k) account do not make buy/sell/hold decisions because they recognize that large institutional investors have the expertise and resources they do not. Those who make the buy/sell/hold decisions are in a better position to make voting decisions than someone who has no idea why a stock is in the portfolio or even whether it is. Furthermore, thanks to the tireless work of our Chair and the founder of ISS, Robert A.G. Monks, over 14 years, the SEC requires investment managers to disclose their proxy votes. Customers can now see whether their investment managers voted in favor of outrageous pay plans or against shareholder proposals on climate change and switch to another manager if they do not like those votes. This is how markets work.
Let us also point out again that the shareholder proposals Mr. Patch is so worried about are non-binding. Even a 100 percent vote in favor can be overruled by the company. No one is forcing America’s most powerful companies to do anything they do not think is a prudent use of their resources.
If any pressure is being put on companies, it is from shareholders, not proxy advisory firms. That is how capitalism works, and if executives feel unduly pressured, they can take the company private, and see how they feel about pressure from those owners.
As for The Weekly Standard and Mr. Patch, we recommend that they take a refresher course in economics, markets, and consistency.