To create value for shareholders, workers and consumers over the long haul, U.S. companies need a regulatory environment that is conducive to promoting job creation and economic growth. This particularly means enacting policies that will improve the efficiency of U.S. capital markets and enhance good corporate governance, including the quality of information available to shareholders and investors.
Unfortunately, such an environment has not yet been fully realized, largely due to the current proxy voting process and the role proxy advisory firms play in this process. Today, two proxy advisory firms, Institutional Shareholder Services and Glass Lewis, account for 97 percent of the market share of the proxy advisory business and wield enormous influence. How is that possible?
ISS clients directly influence an estimated 20 percent to 30 percent of the votes of a typical mid- to large-cap public company, while Glass Lewis clients typically influence 5 percent to 10 percent of the votes. Mind you, these are the firms from which many institutional investors, which hold 76 percent of outstanding U.S. publicly traded shares, receive advice for managing their fiduciary duty to vote proxies in the best interests of the beneficial owners they represent.
The CEO members of Business Roundtable — who lead major U.S. companies with $7 trillion in annual revenues and nearly 16 million employees — see the outsized influence of ISS and Glass Lewis up close and feel the negative effects of their often inaccurate reporting, conflicting interests and lack of transparency and accountability.
In a survey conducted in 2013, nearly all Business Roundtable CEOs reported finding significant factual errors in reports prepared by proxy advisory firms. According to a 2010 survey of HR Policy Association members and Center On Executive Compensation subscribers, 53 percent of the chief human resource officers of large companies say that a proxy advisory firm had made one or more mistakes in a final published report on the company’s compensation programs in 2009 or 2010. Public companies have little opportunity under the current regulatory regime to help correct these errors and inaccuracies.
Meanwhile, ISS offers proxy voting recommendations while also offering paid consulting services to the companies whose proxies they evaluate. Glass Lewis is owned by the Ontario Teachers’ Pension Plan, which invests in companies on whose proxies Glass Lewis makes recommendations. The owners, executives and staff of proxy advisory firms are free to invest in, or even serve on the boards of, public companies whose proxies they assess.
Furthermore, neither ISS nor Glass Lewis fully discloses the methodologies used to develop their voting recommendations. They also do not disclose the academic research, if any, that is used in formulating their decisions and whether or not such decisions were based on the creation and preservation of shareholder value.
The good news: There is positive, bipartisan momentum to strengthen the transparency and accountability of the proxy advisory process.