At last! A serious financial journalist starts to see the proxy advisory industry for the investment shakedown operation that it is. In Fortune, Jen Wieczner asks the question “Do proxy advisors hurt your returns?,” and comes up with an answer that isn’t apt to warm many hearts at ISS and Glass-Lewis. Good for Fortune, and good for Wieczner.Wieczner’s article is the latest helpful reminder why proxy advisors serve little useful economic purpose for anyone except themselves. The notion that underlies the industry, recall, is that money managers are too conflicted by their competing economic interests to be trusted to vote company proxies solely for the benefit of their investors. (Why money managers are especially suspect in being able to juggle the conflicts inevitable in any commercial enterprise, I can’t say.) Anyway, the S.E.C. enshrined this concern into official policy in 2003 when it approved a rule requiring managers to disclose their proxy votes and the policies they used to determine them. Then a year later, the advisory business got its big oomph: the S.E.C. issued a “no-action” letter that lets managers who use outside advisors in deciding their votes off the hook.
You can imagine what that did for business. By now (and these numbers come from Fortune), ISS and Glass-Lewis, the industry’s duopolists, sell proxy reports for more than 37,000 annual meetings to institutional money managers who pay upwards of $1 million a year for subscriptions. The advisors’ recommendations can swing up to 30% of votes cast. All, remember, in order to keep the S.E.C. off money managers’ backs.This sort of regulatory parasitism wouldn’t be quite so objectionable if the advisors actually provided thoughtful guidance that was tailored to individual clients. But they don’t. Instead, a sort of check-the-box governance theology has evolved that leaves little room for dissent. Thus, from what I can see, the CEO position should always be separated from the chairman’s, no matter the circumstances. Put aside what logic and experience might have to say on the matter; the dogma is settled.Sorry,I don’t buy it. Corporate America is too big and complex an enterprise for such one-size-fits-all solutions to make much sense. And, in fact, some of the recommendations the advisors have come up with have been preposterous. Say what you will about what JPMorgan Chase has gone through over the past several years, splitting the CEO from the chairman’s role (as both advisors recommended in 2013) would’ve merely ticked off Jamie Dimon and made decision-making more unwieldy. The benefit to shareholders would have been zero. More laughable was the time, in 2004, when both firms recommended that Coca-Cola shareholders not vote for Warren Buffett for re-election to the board on account of some theoretical conflict arising from certain deals between Coke and Berkshire Hathaway subsidiaries. Maybe it’s me, but judgments like that don’t seem like they’re worth $1 million per year.In the end, Wieczner’s implication that proxy advisors actually hurt investor returns may be a bit of a stretch. But I don’t see what benefits the services provide, either. Besides, if you’ve chosen a money manager that can’t even be trusted to cast corporate votes properly on your behalf, proxy decisions are the least of your problems.What do you think? Let me know!