For the first time, six of the world’s most influential shareholder voting research and analysis firms (better known as “proxy advisors”), which help institutional investors vote shares at stock-exchange-listed companies worldwide, have each publicly released reports showing how they comply with the latest industry Best Practice Principles.
Proxy advisors have been a target of corporate criticism ever since Institutional Shareholder Services (ISS) pioneered the voting-recommendation industry in 1985. Through its landmark 1988 Avon Letter, the US Department of Labor first declared the share ballot an asset—making it all but mandatory that ERISA-regulated funds cast them. The rule paved the way for an expanded industry of voting research and advisory firms. But for decades many institutional investors commonly handled the responsibility as a low-status compliance exercise. In 2007 Lord Paul Myners, later UK City Minister, scathingly referred to proxy staff as the “open-toed sandal brigade” beavering in the basements of investment houses.
That’s not the case today. Increasingly, investors are merging the voting responsibility with investor-corporate engagement in a new discipline that has become known as stewardship. Moreover, as asserted most prominently in annual letters from BlackRock’s Larry Fink and State Street Global Advisors’ Cyrus Taraporevela, stewardship is now seen as a central means for mainstream investors—not just activists—to seek and protect share value. As a result, institutions have piloted a steady drift away from routine endorsements of corporate management and toward more critical stances on executive pay, director nominations, ESG, and a host of other issues.
Not surprisingly, detractors have escalated attacks on proxy advisors, charging them with feeding that drift with toxic conflicts of interest, shoddy and inaccurate research, and chronic unresponsiveness. Despite general investor satisfaction with the industry, critics have succeeded in multiple jurisdictions in persuading regulators to step up oversight of voting advisors. In 2020 the US Securities and Exchange Commission, for example, reclassified proxy advice as “solicitation” and adopted new guidance designed to give issuers more advance notice of analyses and investors more explanations of conflicts of interest. The Department of Labor, for its part, placed fresh duties on investors to monitor proxy advisors they hire.
Such measures are under legal challenge and may be reversed or amended by the Biden administration. But Europe has not been far behind. France’s Autorité des marchés financiers (AMF), under Article R. 544-1 of the Monetary and Financial Code, now requires proxy advisors registered in the country annually to disclose research methods, conflicts of interest, and policies on communication with issuers. [footnotes omitted]Proxy Advisory Firms Release First Reports on Latest Best Practices