Are Proxy Advisors Really a Problem?

By Timothy M. Doyle

Proxy advisor recommendations are a key tool for institutional investors, particularly passive investors with hundreds, if not thousands, of proxy votes to submit each year. Unfortunately, as previous ACCF research has explored, there are institutions that automatically and without evaluation rely on proxy firms’ recommendations. This phenomenon, called “robo-voting,” has the potential to be a breach of fiduciary duty at the fund-level.

As explored in greater detail in this report, companies often complain that there is an immediate spike in voting after proxy advisors issue recommendations. This suggests that, at least in some cases, institutions do not take the time to fully vet proxy advisor reports to the potential detriment of shareholders at large. Some asset managers have separated themselves from this trend, increasing their investment in proxy due diligence and increasing the size of investment stewardship teams. Yet as more asset managers seek ways to cut costs in order to compete in the environment of low-expense fees, the concerning trend in robo-voting must be explored.

Further compounding this issue is the brief time companies have to respond to erroneous recommendations, leaving little room to correct proxy advisor mistakes before votes are cast. Since the voting spike happens within three days of the recommendation issuance, companies do not have the opportunity to adequately respond to the recommendation, even if it is factually incorrect.
When recommendations do contain errors, the main recourse a company has is to provide a supplemental proxy ling. As explored in this report, these voluntary filings provide written, public accounts of company disputes with ISS and Glass Lewis in a manner transparent to the SEC and help to quantify the universe of problems companies experience with proxy advisors each year.

Unfortunately, many companies are unable to adequately respond to errors in these recommendations due to the reality that proxy advisors do not give prior notice and provide companies little time to respond to recommendations. Compounded with the prevalence of automatic voting, the deficiency in the process undermines an investor’s right to accurate and timely information.

The American Council for Capital Formation (ACCF) has previously written on proxy advisors, noting that over reliance on their recommendations decreases the ability of companies to advocate for themselves or their businesses in the face of an adverse recommendation. The outsized power this places in the hands of proxy advisors has lasting implications for corporate policy, profits, and disclosures.