Inside Financial Services

Proxy Advisors Are Still Useless

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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!

8 Responses to “Proxy Advisors Are Still Useless”

  1. Fred "the Shred" Goodwin

    All UK PLCs have a separate nonexecutive chairman separate from the CEO. That is why you never see UK banks getting into trouble.

  2. Robert Buhrmann

    This will end up like the credit rating agencies. They will not see something and bad will come of it. It will take a long time but it will happen. Besides if the money manager I pick isn’t watching and making thoughtful decisions I don’t think I want him/her as my money manager. The buck should start and stop with them.

  3. K

    And don’t forget that many of those 37,000 companies (including my own) holding annual meetings also cut a check to ISS for their “advice” on how to improve corporate governance, etc. Not that that would bias anything, of course.

  4. Strongboy CPA

    Having been a CPA in public practice for over 40 years I know that everyone is in it for the money. Everyone seeks a niche specialty. If you can make something you are a manufacturer, if you can do analysis you are a consultant to business or government. That includes CPA’s providing services that are deemed as required to understand and bless how companies work.

    Proxy services are the same. They created a service by exploiting a perceived gap in mutual fund governance, i.e.: that they do not exercise input to management of companies they hold by not voting shares.

    What they the public and the SEC missed is that just owning shares in a company endorses management. If you don’t agree with the philosophy and practices of a company they can sell. Hold and you agree, sell and you disagree.

    Simple it is.

    Thanks Tom!

  5. Jonathan Finger


    I have not seen the Fortune article that you reference, but I do disagree with your confusion. When we attempted to change the corporate culture at Bank of America in 2009. I found that many of the institutional investors (outside of pension funds) were quite uninterested in corporate governance, and viewed it as a chore rather than a responsibility to hold management and the board accountable for their strategic and capital allocation decisions. While one might criticize a proxy voting service for having a formulaic process or approach, we found that they DO get engaged with boards of directors and activist shareholders to understand what the issues are and they DO analyze the situation and make recommendations. I find that debate around issues tends to push people towards the best decision rather than silence or indifference. And many institutional investors were indifferent. We even found a state teachers retirement system whose proxy voting office was unaware that its investment office was lead plaintiff on a case. I think there is an important part that proxy voting services play in corporate governance. I wish the same services were available to individuals.

  6. Sarah Wilson, CEO, Manifest, GB

    An interesting article, bordering on libel actually – my understanding of a “shakedown” is that it is a criminal act of coercion or intimidation for personal gain. That’s a very serious accusation you are making, I hope you have some evidence to back it up rather than a pet peeve.

    Investors don’t use proxy research because they are conflicted any more than they use investment research from Goldman Sachs or data from Bloomberg because they are conflicted. Asset managers and investors use research and analytical services every day to make buy/sell decisions – what’s your issue with voting research to make voting decisions? Voting is a shareholder right just the same as trading – only not nearly so well paid. Furthermore some of us having been providing proxy support services since well before the SEC’s letter. We agree, the no-action letter was badly written; however it’s not a “get out of jail free” card, investors can only use that defence if they are really conflicted, which is not all the time. We’d be delighted to see the no action letter disappear – with one caveat, the reason it got written was to draw attention to ISS’s alleged conflicts of interest in providing research to issuers and investors at the same time (just like Goldman Sachs, Morgan Stanley, JP Morgan et al)

    I guess you’ve probably never read 6,000 proxy statements during a season, if you had you would probably agree that it is quite reasonable to outsource the parsing of data and provision of research and analytics to flag up policy concerns. However, legally, an investor cannot outsource a fiduciary responsibility. Perhaps you would prefer that investors either didn’t vote at all or just gave management a free pass? Now that would definitely be a failure of fiduciary duty.

    If proxy analysts are a “shakedown” so is Goldman Sachs, so is Reuters, Bloomberg, anyone who supports the investment process. That would also include JP Morgan and the various custodian banks who shakedown their clie

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