From The Harvard Law School Forum on Corporate Governance and Financial Regulation
New research from the American Council for Capital Formation identifies a troubling number of assets mangers that are automatically voting in alignment with proxy advisor recommendations, in a practice known as “robo-voting.” This trend has helped facilitate a situation in which proxy firms are able to operate as quasi-regulators of America’s public companies, despite lacking any statutory authority.
While some of the largest institutional investors expend significant resources to evaluate both management and shareholder proposals, many others fail to conduct proper oversight of their proxy voting decisions, instead outsourcing decisions to proxy advisors. We reviewed those asset managers that historically vote in line with the largest proxy firm, Institutional Shareholder Services (ISS), finding 175 entities, representing more than $5 trillion in assets under management, that follow the advisory firm over 95% of the time.
Proxy advisors regularly assert that their recommendations are only intended to be a supplemental tool used in voting decisions, yet too many asset managers fail to evaluate company specific considerations. Robo-voting is more concerning given recent concerns over the accuracy of advisor recommendations, the limited amount of time proxy advisors allow for company corrections, and the need for investment managers to align voting with fiduciary considerations, collectively highlighted in our previous study, Are Proxy Advisors Really A Problem? (discussed on the Forum here).
This new report, “The Realities of Robo-Voting,” quantifies the depth of influence that proxy advisory firms control over the market and identifies asset managers that strictly vote in alignment with advisor recommendations. Significantly, the research finds that outsourced voting is a problem across different types of asset managers, including pension funds, private equity, and diversified financials. Further, size of assets under management appears to have little impact, as both large and small investment firms display near-identical alignment with advisor recommendations.
The lack of oversight of proxy advisors, who dictate as much as 25% of proxy voting outcomes, is increasingly becoming a real issue for investors and it must be addressed. This report offers additional analysis of the asset manager voting landscape and reiterates important questions regarding the influence, impact, and conflicts of proxy advisory firms.