The theory behind the proxy advisory industry is that it helps its clients fulfill their fiduciary duties by allowing them to vote their shares in accordance with what their informed preferences would have been if they did their own research. A recent study suggests that this isn’t how it works in practice. Here’s an excerpt from the abstract:
Our main finding, for the period 2004-2017, is that proxy advice did not result in funds voting as if they were informed – more often than not it pushed them in the opposite direction – and this distorting effect was particularly noticeable for ISS. The finding is robust to several strategies designed to control for endogeneity of acquiring information and seeking proxy advice, including fixed effects and instrumental variables.
We also show that advice distorted votes toward policies favored by socially responsible investment (SRI) funds, and provide suggestive evidence consistent with the idea that proxy advisors slanted their recommendations toward the preferences of SRI funds because of pressure from activists.
The study started by looking at how informed funds (those that accessed proxy materials on EDGAR) voted, and compared that to how the funds that relied on proxy advisors voted across a range of 9 common governance-related proposals (these included board declassification, independent chair, majority vote, political contributions and proxy access proposals). With the exception of declassification proposals, the study found that those funds that relied on proxy advisors voted more frequently in favor of these proposals than did their informed counterparts. The study found that ISS’s advice moved its customers in the “wrong” direction on 7 out of the 9 proposals. Glass Lewis fared better, with its advice moving customers in the same direction as informed funds on 6 out of the 9 proposals.
So, this study suggests that proxy advisor voting recommendations are slanted because of activist pressure, which results in their non-SRI clients often voting in ways that are contrary to what their informed preferences would have been. If that holds up, it’s not a good look for the proxy advisors or the fiduciaries that hire them.
– John Jenkins