TheCorporateCounsel.net

Last month, Stanford’s Rock Center for Corporate Governance published a report addressing seven questions about the proxy advisor industry.  One of them involves a topic that’s been discussed quite a bit over the years among boards, management teams and their advisors: “Are these folks really independent?” The report says that the jury’s still out on that one:

Institutional investors rely on proxy advisors to provide an independent assessment of proposed corporate and shareholder actions. However, whether proxy advisory firms are independent is an unresolved question. Some proxy advisors receive consulting fees from the same companies whose governance and ESG practices they evaluate, and the potential exists that they alter their voting recommendations to gain or retain business. Ma and Xiong (2021) show, using a theoretical model, that conflicts of interest can bias voting recommendations and decrease firm value.

Some evidence suggests this might be occurring. Li (2018) examines voting recommendations and finds that ISS shifts its positions to make them more favorable to the preferred position of the client company when Glass Lewis initiates coverage of that company. He concludes “conflicts of interest are a real concern.”

The report goes on to discuss possible policy responses to these concerns about proxy advisor independence. However, given the current regulatory climate and the outcome of recent litigation involving the SEC’s efforts to regulate the industry, it doesn’t look like there’s much inclination among policy makers to dig much deeper into this issue.

If you’re interested in reading more about the questions raised by the Rock Center about the proxy advisor industry and the implications of its report, check out Cydney Posner’s recent blog, which takes a deep dive into these issues.

– John Jenkins