Why Proxy Advisory Reform is Necessary and Long Overdue
Proxy advisory firms provide a cost-effective way for institutional investors to evaluate vote proxies and proposals and meet fiduciary standards. Yet, the current flawed process keeps shareholders from having the information they need to make an informed choice on important matters.
Incomplete Information for Shareholders: Companies are currently unable to review or respond to proxy research reports before they are presented to investors as fact, along with specific recommendations about how investors should vote. Proxy reports are often published very close to the annual meeting date, giving issuers little time to provide fuller information or correct errors. Additionally, a large percentage of investor votes are cast within 24-48 hours following the final advisory report. This flawed process affects shareholders’ ability to fully understand issues before voting as fiduciaries.
Undisclosed Conflicts: Proxy advisors are susceptible to conflicts of interest such as offering consulting services to the same companies they evaluate for investors. This dual role may pressure companies to purchase consulting services to secure favorable recommendations, especially when proxy advisors change the methodology used to evaluate companies.
Unfinished Reforms: In 2020, the SEC finalized a modest set of reforms to make the proxy advisory process more transparent and accurate, but they are bogged down in court while companies pay the price.
Policy Recommendations for a Principled Proxy Advisory Process
- Provide for Issuer Review: Issuers must be able to review, but not change, draft proxy reports to ensure the data is properly validated before investors use it to make fiduciary voting decisions. A link to the issuer’s response should be included in the final version to investors.
- Require Conflict Disclosure: Proxy advisors should be required to disclose potential conflicts of interest in each proxy report including:
- Providing consulting to an issuer while also providing voting research and recommendation on that issuer.
- Providing consulting to a shareholder proponent while also providing recommendations to other investors on that shareholder’s proposal.
- Being owned by an investor group that advocates on the same issues subject to recommendations by the proxy advisor.
- Reinstate SEC Authority: HRPA supports efforts to reinstate the 2020 SEC rules on proxy advisors and recognizes that the SEC has statutory authority to regulate proxy advisory firms and oversee vote recommendations as “solicitation” under proxy rules.
