As noted in the Business Roundtable news release below, Executive Director Niels Holch of the BRT-led Shareholder Communications Coalition called for reforms to the shareholder communications and proxy advisory system in testimony Wednesday, June 5, to the House Subcommittee on Capital Markets and Government Sponsored Enterprises.

At the hearing entitled, “Examining the Market Power and Impact of Proxy Advisory Firms," Holch testified that there is little regulation or oversight of private firms that provide proxy advisory services to institutional investors. 

There is a lack of transparency in the way proxy advisory firms operate, with insufficient information available about their standards, procedures, and methodologies. Conflicts of interest exist in several of their business practices; and concerns exist about their use of incorrect factual information in formulating specific voting recommendations.

These firms have considerable influence in the proxy voting process, as they generate voting recommendations for their clients, and, in fact, make voting decisions for some of their clients. The clients of these firms are institutional investors, including pension plans, mutual funds, hedge funds, and endowments.

Despite their large role in proxy matters, proxy advisory firms develop their policies using a “one-size-fits-all” approach that generally applies the same standards to all public companies, instead of evaluating the specific facts and circumstances of each company they evaluate.

The chairman of the subcommittee, Rep. Scott Garrett (R-NJ) was sharply critical of the firms in the news release announcing the hearing. 

In addition to the complexity of the process, questions about conflicts of interest and how proxy advisory firms formulate their voting policies have also been raised. Some proxy advisory firms have aligned with political activists pushing social and political agendas that are contrary to increasing shareholder returns.

“Proxy advisory firms have no duty to make voting recommendations in the best interests of shareholders and have no financial interest in the companies about which they provide voting advice,” said Subcommittee Chairman Scott Garrett (R-NJ). “By exploiting the proxy system to push special interest agendas, proxy advisory firms and activist shareholders have increased the costs of doing business for many public companies and dis-incentivized private companies from going public, all without a corresponding benefit to investor returns.”

Garrett added: “Proxy advisory firms have increasingly teamed up with unions, pension funds, and other activist shareholders to push a variety of social, political, and environmental proposals that are generally immaterial to investors and often reduce shareholder value.”

Rep. Garrett has identified a serious problem. 

News coverage ...

• MarketWatch, "Rep. Garrett puts spotlight on powerful ISS," ISS being Institutional Shareholder Services, Inc. The other major proxy advisory firm is Glass, Lewis & Co. 
• Bloomberg, "U.S. House Republicans Bash Power of Shareholder Advisers."
• The DealPipline, "Lawmakers target proxy advisory firms."