The Economist UK - 16.11.2019

P

roxy advisoryservices used to be an

obscure feature of corporate America.

No longer. These geeky outfits, which re-

view mountains of proposals put forward

by shareholders on topics ranging from

mergers and executive pay to climate

change and diversity, then issue recom-

mendations, can sway how their clients

vote. Given that most are big institutional

investors with clout, this advice matters.

Earlier this year analysts at Credit Suisse,

an investment bank, predicted that proxy

advisers’ counsel would decide the fate of

Bristol-Myers Squibb’s mammoth $74bn

bid for Celgene, a rival drugmaker.

Big institutional investors like Capital

Group and Fidelity have in-house teams to

deal with such matters. But most funds rely

on outside advisers. Two of them dominate

the business. Institutional Shareholder

Services (iss), owned by Genstar, an Ameri-

can private-equity firm, provides proxy

recommendations on over 40,000 share-

holder meetings in more than 100 coun-

tries each year. Glass Lewis informs some

20,000 votes in 100 countries. It is owned

by two Canadian asset managers. Between

them,issand Glass Lewis control 97% of

America’s proxy-advice market.

Their client base has boomed. In 1950

institutions held only 10% of American

shares. By 2018 it was close to 80%. As

shareholder activism has grown in Ameri-

ca, so have proxy battles—from 270 cam-

paigns in 2012 to over 300 this year. Prolif-

erating passive investment funds, led by

Vanguard, are keenly handing their voting

rights over to proxy advisers.

Zombie apocalypse

Business lobbies have had enough. “We

have been concerned about proxy advisory

firms for some time,” says Tom Quaadman

of theusChamber of Commerce. He argues

that they lack transparency and have “sig-

nificant” conflicts of interest arising from

their consulting divisions, which advise

companies on improving corporate gover-

nance. A report from the chamber last year

bemoaned an onslaught of “zombie pro-

posals”, which come up repeatedly—and

repeatedly fail to win a majority of votes.

In August America’s Securities and Ex-

change Commission (sec) ruled that voting

recommendations made by the advisers

amounted to “solicitations” under proxy

rules, a higher regulatory standard than the

firms faced before. They would, for in-

stance, have to prove compliance with

anti-fraud provisions.issfiled a lawsuit in

response. On November 5th thesecpro-

posed more rule changes, “to improve the

accuracy and transparency of proxy voting

advice”. Among other things, these would

raise the minimum share of votes required

for shareholder proposals to succeed and

let target firms review proxy recommenda-

tions twice before investors see them.

Corporate groups are cock-a-hoop. The

National Association of Manufacturers,

one of those spearheading the proxy war,

declared that the proposal was “a signifi-

cant victory” that “sets up reasonable

guardrails” on the proxy process. Joseph

Grundfest of Stanford Law School sees

nothing wrong with giving firms the

chance to challenge the factual basis of rec-

ommendations: “As long asissis accurate

in everything it does, it has no additional

legal liability.”

Nonsense, say critics of the new provi-

sions, who liken them to slapping a tax on

Corporate governance

Out with the proxies

NEW YORK

America’s shareholder advisers come under fire

The EconomistNovember 16th 2019 57

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