The U.S Chamber of Commerce’s Center for Capital Markets Competitiveness (CCMC) and Nasdaq have again partnered to conduct our annual proxy season survey. This survey examines the interactions that public companies had with proxy advisory firms during the 2020 proxy season and is intended to inform policymakers and the general public about current practices within the proxy advisory industry.
Proxy advisors play an important role within the corporate governance ecosystem in the U.S. They analyze corporate governance matters at public companies and develop voting recommendations for institutional investors that are tasked with voting proxies in the best interests of Main Street investors. Given the thousands of proxy issues that institutional investors must consider in any given year, a well-functioning proxy advisory system helps ensure that votes are always cast in a manner that enhances the long-term performance of public companies.
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However, the proxy advisory system has operated for years with a number of serious flaws. The industry is effectively controlled by two firms—Institutional Shareholder Services (ISS) and Glass Lewis—that make up over 90% of the market, giving them extraordinary influence over corporate governance standards. These two firms also have a history of being prone to making errors when drafting vote recommendations and operate with significant conflicts of interest. These deficiencies have led to bipartisan calls for reform in Congress and a thorough examination of industry practices by the Securities and Exchange Commission (SEC) over the last decade.
In July 2020, the SEC finalized a rulemaking that will make the proxy advisory industry more transparent and enhance the quality of vote recommendations received by institutional investors. xwThe rule codifies the long-standing position of the SEC that proxy advice constitutes a “solicitation” under the federal proxy rules and establishes a mechanism for public companies to review draft vote recommendations in order to correct any errors or analytical flaws. The rule will also result in more robust disclosures regarding proxy advisory firm conflicts of interest. The SEC concurrently issued Commission-level guidance clarifying the duties of institutional investors that hire proxy advisory firms.The guidance affirms that it would be a breach of fiduciary duty for an institutional investor to automatically rely on proxy advisor vote recommendations without performing its own due diligence and conducting sufficient oversight of a proxy advisory firm it has hired.
Additionally, the Department of Labor (DOL) recently proposed a rule regarding the proxy voting duties of fiduciaries under the Employee Retirement Income Security Act (ERISA).The DOL’s rule would, among other provisions, require that ERISA fiduciaries take steps to affirm that the proxy advisory firms they hire have the ability to provide objective and informed voting advice and that recommendations are not tainted by conflicts of interest. The proposal would also reiterate that fiduciaries are never allowed to subordinate the economic interests of ERISA plan participants to non-pecuniary factors when voting proxies.
These regulatory actions have been informed by several SEC roundtables, requests for public comment, numerous academic studies, congressional hearings, and other forums stretching back over the last decade that have explored problems with proxy advisory firms along with potential reforms.
The CCMC and Nasdaq have long supported changes to the regulatory framework that applies to the proxy advisory industry. In May 2017, Nasdaq made proxy advisory reform a cornerstone of its blueprint to revitalize the capital markets.We believe reforms are necessary to improve the public company model in the U.S. and help stem the drastic decline in public companies that has occurred over the last two decades. Fewer public companies translate to lower economic growth, less job creation, and fewer opportunities for Main Street investors to own the next generation of great American businesses.
This is the sixth year that the CCMC and Nasdaq have conducted the proxy season survey. A record 182 companies participated in this year’s survey, which was conducted during the months of July and August. Participants included public companies of all sizes that cut across virtually every sector of the U.S. economy.
