Jun 04, 2014 - 8:30am

What Color is That Smoke?--Proxy Advisory Firms Need Oversight


Executive Vice President, U.S. Chamber Center for Capital Markets Competitiveness
Senior Advisor to the Senior Executive Vice President

smoke by Dhiraj Singh.JPG

Photo: Dhiraj Singh/Bloomberg
Photo: Dhiraj Singh/Bloomberg

As the old saying goes, where there is smoke there is fire. Well there is some smoke coming out of the Securities and Exchange Commission (SEC) that might indicate progress on an issue of importance to corporations and the investors who invest in them.

Proxy advisory firms are hired by institutional investors to make proxy vote recommendations and cast votes on corporate proxies or director elections on shareholders behalf. However, as with other things in life it isn’t as simple as that.

Two proxy advisory firms constitute 97% of the industry and according to some academic studies may “control” 36% of the proxy vote. Many have expressed frustration with the black box manner these firms develop voting policies and recommendations on shareholder proposals and director elections. The proxy advisory firms also have conflicts of interest. One runs a consulting business to provide advice on corporate governance policies, while the other is owned by an institutional investor. Neither discloses if the proponent of a shareholder proposal or competing director slate is a client.

Despite this lack of transparency and accountability, the market power of these firms has made them the arbiters of what is good corporate governance in the United States.

Concerned about the lack of oversight over proxy advisory firms, the Chamber in March, 2013 released a set of best practices and core principles for proxy advisory firms authored by former SEC Chairman Harvey Pitt. The Chamber principles made recommendations for transparency, accountability, disclosure of conflict of interests and correlating proxy advice to a funds fiduciary duty including shareholder return.

Following the release of the Chamber principles, Congress got into the act with a hearing last June and the SEC held a roundtable in December. During the roundtable there was widespread agreement by investors, businesses and unions on the need for change. Over the past several weeks, SEC Chair Mary Jo White said she received staff recommendations on guidance for proxy advisory firms and now the Wall Street Journal has published a story that the release of this guidance is imminent.

As with the election of the Pope, is the smoke white or gray?  Is guidance coming into play to promote fairness and due process, or will it be more of the same benign neglect?

We should know soon, stay tuned.       

More Articles On: 

About the Author

About the Author

Tom Quaadman headshot
Executive Vice President, U.S. Chamber Center for Capital Markets Competitiveness
Senior Advisor to the Senior Executive Vice President

Tom Quaadman develops and executes strategic policies to implement a global corporate financial reporting system, address ongoing attempts of minority shareholder abuse of the proxy system, communicate the benefits of efficient American capital markets, and promote an innovation economy and the long-term interests of all investors.