Advisory firms ‘increase cost of doing business’, Congressional hearing told
The proxy advisory industry faced criticism for a lack of meaningful controls and concentration of power at a US Congressional hearing set up to determine whether the industry best serves the interest of shareholders.
‘Proxy advisory firms now wield an enormous amount of influence over shareholder voting,’ said Scott Garrett, the Republican representative who chairs the subcommittee on capital markets, which held the hearing into the power of proxy firms. ‘Despite their outsized influence, proxy advisory firms have no duty to make voting recommendations in the best interests of the shareholders.’
Garrett said the firms make voting recommendations based on ‘one-size-fits-all policies’ and ‘have increasingly teamed up with unions, pension funds and other activist shareholders to push a variety of social, political and environmental proposals that are generally immaterial to investors.’
The proxy advisory industry has increasingly come under attack by Republican politicians in the US for its perceived support of activist shareholders and its concentration of power. A study in April by the Republican-leaning Mercatus Center claimed the proxy advisory interest is harming shareholders by allowing institutional investors to outsource their responsibilities as corporate stewards.
A US House background report submitted to the subcommittee states that ISS and Glass Lewis together control 97 percent of the proxy advisory industry. Garret said between 25 percent and 50 percent of the shares of a ‘typical’ US mid-cap or large-cap company are held by owners who receive advice from one of these two main proxy advisory firms.
‘ISS and Glass Lewis are able to sway between 20 percent and 40 percent of shareholder votes, particularly in high-profile corporate elections,’ Garrett said at the start of the June 5 hearings in Washington. ‘Proxy advisory firms and activist shareholders have increased the cost of doing business for many public companies.’
Neither ISS nor Glass Lewis were invited to send representatives to the hearing, which included delegates from NIRI, the Shareholder Communications Coalition and the Center on Executive Compensation, among other organizations.
Jeffrey Morgan, president and CEO of NIRI, testified to the subcommittee that the solution to potential conflicts of interest in the proxy advisory industry, including cases where firms provide consulting services to activist shareholders, ‘starts with transparency. Those conflicts should be shown and stated on any recommendation they make.’
