Proxy Advisers.

• Author: Brannon, Ike

Proxy Advisers * "Proxy Advisors and Market Power: A Review of Institutional Investor Robovoting," by Paul Rose. Manhattan Institute, April 2021.

Investment management is a hyper-competitive business whose practitioners work dreadful hours trying to gain an edge in the market. They don't want to waste time or energy on tasks that are largely irrelevant to their attempts to divine the future performance of publicly traded companies.

One undesirable task they nonetheless have to undertake is voting their proxy shares. The Securities and Exchange Commission requires investment managers to vote their proxies for each company whose shares they own. Because the majority of these votes are rote and inconsequential (shareholders must vote for a slate of directors each year and consider any proposal put forth by a shareholder owning more than $2,000 in shares), most investment managers turn the task over to a proxy adviser.

However, in the last few years an increasing number of proxy proposals have dealt with issues that could potentially affect a firm's long-run performance. After the 2016 presidential election, many activists engaged public corporations on a variety of political issues that the activists were unable to get traction on in Congress or with the Trump administration, mostly pertaining to environmental, social, or governance (ESG) issues. Some of their proposals had the potential to reduce firms' long-run profits, thereby reducing stock values.

However, most investment advisers do not personally vote their proxies for the companies whose stock they own. Because they own stock in hundreds of companies and by law must vote each proxy, most of them foist that task onto a proxy advisory firm.

Two firms, Glass Lewis and Institutional Shareholder Services (ISS), dominate the proxy advising market and are not indifferent to political issues. Perhaps surprisingly, their perspectives often align with the activists who submit such proposals. As a result, activists have begun to win some proxy votes, especially on those related to climate change.

The SEC professed concern with investment managers completely abdicating the task of proxy voting to an outside entity-- sometimes referred to as "robo-voting"--because the practice may reduce clients' returns, suggesting that robo-voting is not in the best interest of investors. In 2020 the SEC completed a rule that put in place a system to allow firm managers to respond to proxy advisory...