Opinion: Proposed proxy adviser reform will create unnecessary regulations
The US Senate is considering legislation that, despite the pretense under which it is being pushed, will fundamentally result in diminishing the rights of shareowners.
Proponents of the legislation – dubbed the Corporate Governance Reform and Transparency Act of 2017 (HR 4015) – contend it will help Main Street investors. In reality, however, the bill will accomplish the opposite.
If this bill becomes law, it will break the long-standing fiduciary bond between proxy advisers, which are hired to provide independent research and analysis of public companies, and their institutional investor clients, which invest in companies on behalf of millions of Americans saving their hard-earned money through 401(k)s, pensions, college savings and other plans. This disingenuous legislation will create new, unnecessary and cumbersome regulations to the detriment of shareholders.
This proposed legislation takes aim at shareholders primarily by giving corporate management the unprecedented right to review and approve the research and vote recommendations that proxy advisers provide to their institutional investor clients.
Proponents have pushed a number of false narratives in support of the legislation – for example, the idea that proxy research reports are error-prone. In reality, ISS is committed to ensuring the accuracy and quality of our reports and we have implemented policies and procedures to achieve that goal. Our sophisticated institutional investor clients demand nothing less. And this false narrative has been debunked by corporations themselves, as reflected in a 2016 Government Accountability Office (GAO) report that notes ‘both corporate issuers and institutional investors that [the GAO] interviewed said the data errors they found in the proxy reports were mostly minor’.
Some critics have also labeled proxy adviser firms as activists. Let’s look at the facts. In 2017, ISS’ voting recommendations for shareholder meetings of the largest 500 US companies were aligned with those of management roughly 92 percent of the time. This shows that ISS – and by extension the investors for which it works – are generally in agreement with the governance practices corporate boards and management are implementing.
In the roughly 8 percent of times ISS’ recommendations did not align with those of corporate management in 2017, they reflected good-faith differences of opinion involving important issues such as director qualifications, dilutive stock option plans, board oversight failures and other matters.
Another misleading suggestion in support of the legislation is that there is no oversight of proxy advisers. ISS is a registered investment adviser, subject to SEC oversight and the rules and regulations of the Investment Advisers Act of 1940. That act, and the related rules and regulations, provide a mature and comprehensive regulatory regime that covers virtually every aspect of our business. Moreover, in December the Congressional Budget Office concluded that proxy advisers already meet many of HR 4015’s requirements.
So what’s really going on here? It seems to us that the proposed legislation is ultimately directed at stifling the voice of the institutional investors we serve, which are the owners of the companies in which they invest. That is wrong on many levels. HR 4015 will only hurt the millions of hard-working Americans across the country who invest their retirement dollars in public companies by depriving the institutional investors that represent them of the unbiased information that helps them make informed decisions.
As the Senate Banking Committee considers this bill, corporate representatives should understand that this proposed legislation is bad policy that would ultimately hinder the rights of company shareowners – many of which, including the Council of Institutional Investors, publicly oppose the bill.
Gary Retelny is president & CEO of Institutional Shareholder Services