It is not to apply a personal activist agenda. Leading Independent Proxy Advisory Firm ISS Recommends Shareholders Vote Against the Removal of Current Directors, Withhold From Voting for Dissident Nominees News provided by Karnalyte Resources Inc. U.S. Securities and Exchange Commission at the SEC in Washington. In short, despite lacking any statutory authority, they have become the de facto regulators of America’s public companies. You may opt-out by. In a recent Op-Ed in Barron’s , four current state treasurers argue that the SEC’s proposed rules for proxy advisory firms are a harmful overstep by the agency tasked with protecting investors and promoting the creation of wealth in this country. You may opt-out by. Proxy advisors have at times been a thorn in public companies’ sides. There was no one on Chesapeake’s board who had leased an acre or drilled a well—no one who could challenge CEO Aubrey McClendon. Just two companies, Institutional Shareholder Services, ISS, and Glass Lewis, together have a 97% share of the market. As the former State Treasurer of Connecticut, I strongly disagree with their position. Just for the U.S. listed companies the rapid analysis of more than 5,900 proxy statements is required within a very short timeframe due to December year-ends. Unlike with Siskel and Ebert, there are antitrust concerns for the two advisors with their 97% market share. In the U.S., there are more than 9,000 mutual funds and hundreds of exchange traded funds (ETFs) that hold stocks, including index funds. Proxy advisory firms currently rely upon the exemptions in Rule 14a-2 (b) (1) and (3) to provide proxy voting advice, to the extent it is currently subject to the proxy rules at all, without complying with the filing and certain other requirements of the proxy rules. Globally, ISS is reputed to make recommendations for more than 40,000 annual meetings and Glass Lewis makes recommendations for as many as 20,000. Just two companies, Institutional Shareholder Services, ISS, and Glass Lewis, together have a 97% share of the market. The advisory firms demur that they are not representing shareholders or investment managers or other clients, but their marketing suggests that knowing more about the corporations can only be accretive to their decision-making. On the flip side, they are paid by corporations to learn more about the corporations. For the Vanguard 500 index fund, there are 500 proxy statements to consider and vote in a short window in the spring of each year. They are paid by investment managers for their proxy analysis. The amendments make proxy voting advice subject to the proxy solicitation rules and condition exemptions from those rules for proxy advisory firms, such as ISS and Glass Lewis, on disclosure of conflicts of interest and adoption of principles-based policies to make proxy voting advice available to the subject … The proxy advisory world is dominated by two firms; together, they control approximately 95% of the proxy advice market. ISS and Glass Lewis are the Siskel and Ebert of their business but have it better than any critic or any sportswriter because they are paid by both the moviegoers and the producers alike. They may recommend votes that management disagrees with, and companies worry the advisory firms could have an outsize influence on proxy votes. The institution may … The two largest proxy advisory firms4 are Institutional Shareholder Services, Inc. (ISS) and Glass, Lewis & Co., LLC (Glass Lewis).5 These two proxy advisory firms heavily influence a substantial portion of the voting power of millions of individual shareholders, which is managed by thousands of asset managers. To support this effort, the proxy advisory firms hire and train seasonal workers much like seasonal tax-preparation firms or seasonal retailers. Investment industry requirements are that managers exercise appropriate diligence and independence to develop a “reasonable and adequate basis” before making an investment recommendation. Corporations faced declining shareholder votes, and this threatened required quorums and the ratification of corporate proposals. ISS applies sophisticated models to evaluate say-on-pay proposals and assess pay-for-performance alignment, and evaluate equity-based pay plans and … The proposed regulations by the SEC will correct the unintended consequences of a 2003 SEC rule that required investment advisors to adopt policies and procedures to vote on all proxy proposals as a way of improving the function of the capital markets. What about the ultimate beneficiaries? Proxy advisory firm are there as to keep a check on the companies working and compliance with laws other governance practices. ISS and Glass Lewis are independent, third-party proxy advisory firms that made recommendations to large investors including pension funds, investment managers, mutual funds and other institutional shareholders.This report by The Canadian Press was first published Dec. 7, 2020.Companies in this story: (TSX:AC, … The role of a fiduciary, codified for over 1000 years in British and American common law, is to invest for the highest return at a reasonable risk. Does the investment manager have recourse? Beneficiaries and corporate issuers rely on investment managers doing their job. The one-size-fits-all business model cannot apply for the vast array of pensioners, hedge funds, funds-of-funds, ETFs, and endowments. Without that value proposition, corporations and other issuers would not have a reason to employ proxy advisors. Proxy advisory firms provide institutional investors with research, data, and recommendations on management and shareholder proxy proposals that are voted on at a company’s annual meeting. As proxy advisory firms are used prevalently by institutional investors to aid them in voting their proxies, it is … The role of public company shareholders in voting anchors our system of corporate governance. I have spent the past 38 years in service to our country in the military, elected office, and appointed office, and as an international banker. Does the issuer have recourse? Over the past 20 years, proxy advisory firms have emerged as a major player in executive compensation and corporate … Currently, proxy advisory firms have zero fiduciary responsibility and zero transparency, and they represent a breakdown of the efficient market hypothesis. The proxy advisory business is simple enough. Glass Lewis, another proxy advisory firm, also provided recommendations. The firm recommended shareholders remove Beletic and Baitler, and replace them with two of Barnhill's nominees. I served 36 years in the. Privately owned, the economic performance of the firms is masked. As former SEC Commissioner, Daniel Gallagher, said in a speech in New York City in October of 2013, “I have grave concerns as to whether investment advisers are indeed truly fulfilling their fiduciary duties when they rely on and follow recommendations from proxy advisory firms. Our four state treasurer colleagues are wrong in their injection of politics into pension fund management, and the SEC is correct in their new proposed rules to correct the mistaken interpretation of their 2003 rule. Proxy advisory firms, specifically Institutional Shareholder Services and Glass Lewis & Company—the two largest firms—develop and update their general voting policies through an iterative process, involving analysis of regulatory requirements, industry practices, and discussions with market … There no such empirical study done in India to show the positive or negative compliance of the recommendations of the firms. Even when a company’s management contests the recommendation of the proxy advisory firm, automatic robo-voting continues as the proxy advisory firms provide the voting technology to money managers, which can be programmed to agree and vote in accordance with the proxy firm’s recommendations. Even though the proxy advisory firms contract to evaluate, assess and recommend proxy votes for their clients, they specifically state that their recommendations come without any express or implied warranty or fitness for any use. EY & Citi On The Importance Of Resilience And Innovation, Impact 50: Investors Seeking Profit — And Pushing For Change, Michigan Economic Development Corporation With Forbes Insights. But, the proxy advisory firms have no vested interest, no skin in the game. The last thing we should want is for investment advisers to adopt a mindset that leads to them blindly cast their clients’ votes in line with a proxy advisor’s recommendations, especially given that such recommendations are often not tailored to a fund’s unique strategy or investment goals.”, I have spent the past 38 years in service to our country in the military, elected office, and appointed office, and as an international banker. Or, for a current example, a soap company executive appears to have the closest industry expertise on the board of a money-losing refinery—no one apart from the CEO has refinery expertise! This duopolistic concentration of power is an absolute erosion of shareholder rights, not an enhancement. When some shares are owned for just minutes, it is not always easy sorting out the shareholder of record as of the voting date. The shortcut of paying someone else to do the research is accepted practice today. The two account for 97 percent of the market for proxy-advisory services. When one firm issues an opinion and recommended vote, the impact is felt immediately by other shareholders voting in a block. Rote reliance by investment advisers on advice by proxy advisory firms in lieu of performing their own due diligence with respect to proxy votes hardly seems like an effective way of fulfilling their fiduciary duties and furthering their clients’ interests. Proxy advisory firms provide shareholders with research and recommendations on how to cast their votes at shareholder meetings. In CII’s understanding, proxy advisory firms are agents of institutional investors, not of issuers. Ticking all of the boxes for Environmental, Social and Governance investing, or ESG, is not a substitute for industry expertise, as Chesapeake demonstrated in 2011 and 2012. TULSA, Okla., June 22, 2017 /PRNewswire/ -- ONEOK, Inc. (NYSE: OKE) and ONEOK Partners, L.P. (NYSE: OKS) today announced that two leading proxy advisory firms, Institutional Shareholder Services (ISS) and Glass Lewis & Co., have recommended votes in favor of the proposed merger transaction between ONEOK and ONEOK … What were the recommendations by ISS and Glass Lewis? lists more than 3,100 companies. Our terrific public employees, who are counting on duty, stewardship, and the highest standard of care for the management of their retirement funds, deserve to be protected from individual political agendas, and the return to accountability, transparency, and politics-free management of our public pension funds. And, according to CII, there is no reason to believe that institutional investors feel the need for prior review by issuers of the work product of their agents, the proxy advisors. No. Published performance audits of ISS and Glass Lewis would be helpful both for investors and issuers. As a board member myself, I understand that boards and management must take into account environmental, social, and governance issues in the running of a company. Their recommendations are all powerful—they alone know how a proxy vote will turn out because nearly all money managers and pension funds abdicate their responsibility for fiduciary oversight to these firms. SASKATOON, SK, Dec. 9, 2020 /CNW/ - Karnalyte Resources Inc. ("Karnalyte" or the "Company") (TSX: KRN) today announced that leading independent proxy advisory firm Institutional Shareholder Services Inc. ("ISS") recommends that Karnalyte shareholders vote AGAINST the removal of current … For diversified institutional investors, the costs of performing independent research on each proposal in each of their portfolio companies are substantial. Suppose there is an error. The proxy advisory business is simple enough. But out of frustration and long study, the SEC is considering a regulation that would provide corporations a maximum of 48 hours to respond to proxy advisory firms proposed recommendations. The second condition for proxy advisory firms seeking to rely on the exemptions available under Rule 14a‑2 (b) (1) or (b) (3) is a requirement that a proxy voting advice business adopt and publicly disclose written policies and procedures reasonably designed to ensure that subject companies have the proxy advisor’s … There is a market opportunity here. On August 21, 2019, the Securities and Exchange Commission (“SEC”), in response to increasing concerns that proxy advisory firms hold excessive sway over voting results, issued guidance (the “2019 Advisor Guidance”)1 that provides investment advisers with recommendations to help facilitate compliance … Under the Commission interpretation, proxy voting advice provided by proxy advisory firms generally constitutes a solicitation subject to the federal proxy rules. All Rights Reserved, This is a BETA experience. Recently, corporations have complained about “robo” voting of shares immediately following the publication of the proxy firms’ recommendations. Proxy advisory firms have become important players in corporate governance, but the extent of their influence over shareholder votes is debated. NDAQ Today, the proxy advisory firms have a great business model. In a business where every hour of labor is expensive, a young clerk at the investment manager can only lose by going away from herd and so a follow-the-leader mentality is prevalent. We estimate the effect of Institutional Shareholder Services (ISS) recommendations on voting outcomes by exploiting exogenous variation in ISS recommendations … A study conducted by Bethel, and Gillan in 2002 on the status of U.S proxy advisory firm … Proxy advisory firms have typically relied upon the exemptions in Rule 14a‑2(b)(1) (exempting solicitations by persons who do not seek the power to act as proxy for a shareholder and do not have a substantial interest in the subject matter of the communication beyond their interest as a shareholder) and Rule 14a‑2(b)(3) (exempting proxy voting advice furnished by an advisor … For more than a decade, the SEC has been wrestling with whether and how to regulate the activities of the proxy advisory firms — principally ISS and Glass Lewis — that have come to play such an important role in … Opinions expressed by Forbes Contributors are their own. Annual shareholder meetings typically include votes for or against candidates for director p… Proxy advisory firms exist at the nexus of some of the most high-profile corporate law discussions—most notably, the shareholder voting process, which has recently been the subject of much scholarly and legal debate. As a result, some of these public companies have long lobbied the SEC to cast its regulatory eye on proxy advisory firms. They are paid twice to employ cheap labor to “analyze” thousands of proxy statements to issue opinions for which they accept no responsibility. EY & Citi On The Importance Of Resilience And Innovation, Impact 50: Investors Seeking Profit — And Pushing For Change, Michigan Economic Development Corporation With Forbes Insights. I am a UH Energy Fellow at the University of Houston, © 2020 Forbes Media LLC. Currently, proxy advisory firms have zero fiduciary responsibility and zero transparency, and they represent a breakdown of the efficient market hypothesis. The spate of bankruptcies during the pandemic is exposing corporate boards that received positive ratings and recommended votes from the advisory firms. Because the SEC has determined that the proxy advisers’ recommendations are solicitations, these recommendations are the equivalent of a corporate raider’s proxy solicitation. The worst manifestation of this unaccountable concentration of power over our public pension funds is so-called “robo-voting.” Robo-voting is the practice of money managers and pension funds to blindly rely on the recommendations of proxy advisors. The Commission’s interpretation does not affect the ability of proxy advisory firms to continue to rely on the exemptions from the federal proxy rules’ filing … The fiduciary duty…must demand more than that. I served 36 years in the United States Marine Corps (Reserve), four terms in elected office in Connecticut, and also as Assistant Secretary and CFO of the U.S. Department of State under Colin Powell and Under Secretary of State for Management (acting), and as Under Secretary General of the United Nations under Kofi Annan. © 2020 Forbes Media LLC. Opinions expressed by Forbes Contributors are their own. In the U. S., most common shareholders receive voting rights that protect their economic interests, alongside common-law fiduciary duties imposed on corporate boards and managers and, for publicly traded corporations, the ability to sell shares in liquid markets. As Professor David Larcker of the Stanford Graduate School of Business has estimated, these two firms control as much as 30% of any corporate proxy vote. Although there are some exceptions, voting rights in publicly traded … Corporations could point out errors in fact to the advisory firms’ statements but, of course, could not force the firms to withdraw recommendations or otherwise restate their conclusions. While a public company’s day-to-day business decisions are the responsibility of management and the board of directors, shareholders vote on a number of important issues that can affect the value of their shares. Court cases, leveraged buyouts, the rise of index vesting such as the Vanguard 500 mutual fund, and the churn of shares in hedge funds all brought to light the problems of administering proxy voting for both shareholders and issuers. The Securities and Exchange Commission has proposed that publicly traded companies be given 48 hours to respond to the statements and voting recommendations made by proxy advisory firms, which provide analysis and research for investment fund managers. Proxy advisory firms Glass Lewis, ISS back revised Transat deal with Air Canada The Canadian Press Air Transat and an Air Canada aircrafts are seen on the tarmac at Montreal-Trudeau International Airport in … For decades we called this “responsible leadership.” I do not, however, believe that blind robo-approval of any proposal is anything other than the injection of a political agenda into proxy voting by proxy advisory firms with zero oversight and no transparency. The advisory firms already know that their investment management clients are lazy. But the hallmarks of monopolistic behavior are high prices and lower levels of service than are found in competitive markets. Most pensions systems and money managers immediately outsourced this voting process to proxy advisory firms as a way of dealing with the tens of thousands of proxy votes each year, and to comply with a new SEC requirement that their vote be “based upon the recommendations of an independent third party.” The new proposed rules under SEC Chairman Clayton are meant to clarify and strengthen the 2003 rule, ensuring greater transparency and accountability by holding the two dominant and powerful proxy advisory firms to a much higher standard. All Rights Reserved, This is a BETA experience. The two most influential proxy advisory firms—Institutional Shareholder Services ("ISS") and Glass, Lewis & Co. ("Glass Lewis")—recently released their updated proxy voting guidelines for 2021. The NYSE hosts trading for more than 2,800 companies, while the NASDAQ They began as consultants to pension fund and investment funds managers who, although they are paid to be fiduciaries for their beneficiaries, could never quite find time to analyze the annual proxy statements of their portfolio holdings. I have also been lucky enough to serve as CEO of Columbus Circle Investors, a PIMCO company, vice chairman of PIMCO funds distribution company, vice chairman of Deutsche Bank Asset Management and global co-head of private equity, and currently serve as CEO and Chairman of Cambridge Global Capital, and founder and President of the Institute for Pension Fund Integrity, where we fight for transparency and accountability in the management of our public pension plans and adherence to fiduciary responsibility, and against those who seek to impose their personal political agenda on the management of our retirement dollars. 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