The unregulated efforts of proxy advisory firms have in recent years skewed to favor special interests. That’s why it is particularly troubling to see ISS CEO Gary Retelny claim in an opinion that proposed legislation “would harm many hard working Americans… by depriving the institutional investors who represent them of the unbiased information that helps them make informed decisions.” Mr. Retelny’s piece fundamentally mischaracterizes the legislation, as well as the objectives of those who support it, including my own organization, the Main Street Investors Coalition.
Introduced by Reps. Sean Duffy (R-Wis.) and Gregory Meeks (D-N.Y.), the Corporate Governance Reform and Transparency Act of 2017 (H.R. 4015), aims to “improve the quality of proxy advisory firms for the protection of investors and the U.S. economy, and in the public interest, by fostering accountability, transparency, responsiveness, and competition in the proxy advisory firm industry.” The bill passed the House at the end of last year and is now under consideration in the Senate, where it was discussed by the Banking Committee on Thursday.
{mosads}Mr. Retelny’s argument that the legislation will “deprive” institutional investors of unbiased information from proxy firms is little more than a piece of linguistic sleight of hand. H.R. 4015 is primarily intended to allow publicly traded companies to review proxy advisory firms’ recommendations for inaccuracies in the underlying data, something they are currently unable to do.
Businesses and investors alike have been harmed by faulty voting recommendations based on mistakes or misinterpretations of corporate information that can lead to damaging outcomes in shareholder votes. Some research suggests that proxy voting recommendations can actually lead to “choices that decrease shareholder value.” H.R 4015 will give companies the ability to correct obvious mistakes before shareholders access proxy recommendations.
Significantly, it will also address the potential for conflicts of interest in the proxy firm business model, an issue which has been highlighted by numerous organizations.
ISS, in particular, has clear potential for conflict of interests, as it provides shareholder voting recommendations on publicly traded companies and consulting services to those same businesses. This could potentially give rise to the concerning situation where ISS could recommend that shareholders vote in a fashion that would compel an executive to retain its consulting.
It’s worth noting that that even Glass Lewis opposes this model, publicly stating that “We believe the provision of consulting services creates a problematic conflict of interest that goes against the very governance principles that proxy advisors like ourselves advocate… we do not operate a business model that treats its proxy research reports as a loss leader for more lucrative consulting fees.”
Under such circumstances, it’s perhaps unsurprising that Mr. Retelny seeks to write-off supporters of the legislation as “Washington’s powerful business lobbies”. But such a description is overly simplistic and ignores, perhaps deliberately, a fundamental alignment of objectives in the interests of most investors.
It’s no secret that the Main Street Investors Coalition is not only supported by retail investors (who compose our advisory board), but also by the corporations whose stock they own. One of our founding members is the National Association of Manufacturers, a fact made clear on our website and in all of our materials.
But just because business supports our campaign, that doesn’t mean that it’s contradictory to the goals of Main Street investors. In fact, research has shown time and again that the majority of investors are opposed to the use of their funds to pursue subjective agendas and simply want to maximize the value of their holdings – the exact same goal of the business community.
Mr. Retelny’s opinion does a disservice to the many shareholders who his industry indirectly serves. No one is arguing that institutional investors should not be able to receive “unbiased information that helps them make informed decisions.” At present, they do not have free access to that very advice his firm provides, a situation which is clearly unsatisfactory.
H.R. 4015 will make a meaningful difference in addressing the conflicts of interest, lax oversight, and history of shoddy research underlying voting recommendations that are currently all too present in the proxy industry. Retail investors everywhere will be better off as a result.
George David Banks is the Executive Director of the Main Street Investors Coalition. He is also Executive Vice President at the American Council for Capital Formation.