This week we analyzed the key activities undertaken by independent corporate governance and proxy voting agencies to gain a deeper understanding of their role in ensuring fair and transparent decision-making processes within organizations. In the present text, we will explore the role that proxy advisors play in the industry, the main services they provide, and who they provide them to. Additionally, we will analyze how much influence agencies have on the decisions shareholders make and how can those decisions affect governance practices.
Independent corporate governance and proxy voting agencies play an important role in the investment industry. They provide objective analysis and recommendations to investors on how to vote on diverse issues at companies’ annual general meetings (AGMs) or extraordinary general meetings (EGMs). These agencies act as intermediaries between shareholders and companies, providing investors with the information they need to make educated decisions about how to vote on proposals, and engage with companies on improving corporate governance practices and ESG issues. The largest and most renowned agencies in the market include Institutional Shareholder Services (ISS), Glass Lewis & Co. (Glass Lewis), Proxy Insight, and Institutional Investor Services Inc (IIS).
These agencies offer a wide variety of services, including research and analysis on various corporate governance issues, assessing the performance of boards of directors, and sustainability and ethical practices, including impacts on environment and society, diversity and inclusion policies, and human rights, and evaluating executive compensation packages. They also provide recommendations and voting guidance to investors on matters such as board member elections, proposed mergers and acquisitions, and other corporate resolutions. Additionally, they often publish reports and analyses on governance trends and best practices, which can help raise awareness of important issues and encourage companies to improve their practices.
In terms of their client base, these agencies typically target institutional investors and asset managers, who are responsible for making investment decisions on behalf of their clients. These investors include pension funds, mutual funds, hedge funds, and other large investment managers that hold significant stakes in companies.
We will now briefly analyze the influence that these agencies have on shareholders, and how their recommendations impact investor decisions. According to an American Council for Capital Formation’s (ACCF) analysis, the influence of these agencies continues to grow as more institutional investors follow their recommendations. Known as robo-voting, the ACCF states that many institutional investors, mainly asset managers, rely on both proxy advisors’ recommendations and in-house practices without evaluating the recommendations and analysis underpinning them.
According to the ACCF, a 2017 Proxy Insight study suggests that 175 asset managers across the world, with over $5 trillion in assets under management (AUM), voted in line with ISS 95% of the time. Additionally, equity plan proposals (proposals regarding the issuance or allocation of equity-based compensation to employees or other individuals associated with a company), and uncontested director elections (process of electing directors to a company’s board of directors) received 17% and 18% more votes in favor, respectively, when ISS recommended a favorable vote. The same study suggests that proxy contests (when a group of shareholders seeks to gain control of a company’s board of directors by soliciting other shareholders to vote for their proposed director nominees) received 73% more votes when this agency supports the measure. A paper called “The Power of Proxy Advisors: Myth or Reality?”, states that the level of influence of ISS, is estimated to stand between 6% and 11%.
However, ISS is not the only proxy advisor with important influence over decision making. This ACCF study states that Glass Lewis also exerts important influence on the behavior of investor decision-making. When this agency approves favorable votes regarding executive compensation packages, equity plans, and proxy contests, institutional investor support tends to increase by 16%, 12% and 64%, respectively.
Leaving behind proxy voting, evidence suggests that proxy advisors also have important influence on corporate governance choices. A 2012 survey by the Conference Board, NASDAQ, and the Rock Center for Corporate Governance at Stanford University stated that 72% of public companies engage with corporate agencies to receive both feedback and guidance on their compensation plans. Moreover, these companies reported making a wide range of changes to their compensation programs in response to proxy advisor recommendations (for additional evidence regarding these issues, click here).
However, proxy advisors can’t always be precise on how investors will vote. For example, in 2020, most of ExxonMobil’s shareholders voted against a proposal recommended by proxy advisors to split the roles of CEO and Chairman. This indicates that, although investors may follow many recommendations coming from independent agencies, they may also prioritize their own interests over the recommendations of proxy advisors.
As mentioned, these agencies strongly influence international investor decision-making. However, in Mexico, most publicly traded companies continue to be controlled by some of Mexico’s wealthiest families. Consequently, corporate governance remains tied to individual decisions, impacting the progress and implementation of best corporate governance and proxy voting practices.
In summary, it is important to promote the role of independent corporate governance and proxy voting agencies in shaping governance practices and in influencing shareholders’ decisions in companies across markets. As seen above, these agencies play an important role in promoting adequate governance practices and holding companies accountable to their shareholders.
If you have any questions or additional concerns about this topic, at Miranda-IR we would be more than happy to speak with you.
Sources
- https://accfcorpgov.org/wp-content/uploads/ACCF-RoboVoting-Report_11_8_FINAL.pdf
- https://www.glasslewis.com/wp-content/uploads/2016/08/Glass-Lewis-BPP-Statement.pdf
- https://www.glasslewis.com/wp-content/uploads/2017/04/Guidelines_MILA.pdf
- https://www.manhattan-institute.org/html/proxy-advisory-firms-empirical-evidence-and-case-reform-11253.html#notes
- https://www.reuters.com/article/exxon-mobil-agm-idUKL2N2350V1
- https://scholarlycommons.law.emory.edu/cgi/viewcontent.cgi?article=1370&context=elj
Additional reading suggestions
- https://bppgrp.info/wp-content/uploads/2022/09/2022-AR-Independent-Oversight-Committee-for-The-BPP-Group.pdf
- https://www.cato.org/regulation/fall-2018/corporate-governance-oversight-proxy-advisory-firms
- https://corpgov.law.harvard.edu/2018/06/14/the-big-thumb-on-the-scale-an-overview-of-the-proxy-advisory-industry/
- https://milkeninstitute.org/report/proxy-advisory-firms-governance-market-failure-and-regulation
Contacts at Miranda Partners
Damian Fraser
Miranda Partners
damian.fraser@miranda-partners.com
Ana María Ybarra Corcuera
Miranda-IR
ana.ybarra@miranda-ir.com