Roslyn Layton writes that proxy advisors, which provide voting services for shareholder meetings, can influence how publicly traded firms conduct their business. Two proxy firms–Glass Lewis and Institutional Shareholder Services (ISS)–have 97 percent of the market and have allowed some minority shareholders to exercise outsized influence.
A proxy firm helps listed companies conduct voting among shareholders with agenda setting, voting software management, and policy development. This facilitates the process for shareholders to vote on management, executive pay and occasionally on shareholder proposals. Their rise has been featured in ProMarket commentary in articles about Exxon’s ESG practices, Elon Musk’s compensation, and “woke” leadership at Disney. These articles discuss examples of proxy advisors voting items, and this article will address new proxy advisors within the academic framework of shareholder democracy.
Professors Luigi Zingales and Oliver Hart describe proxy voting among methodologies in The New Corporate Governance. They explain how proxy advisor Institutional Shareholder Services (ISS) offers “specialty” voting guideline categories that allow investors to choose a voting philosophy, such as voting in a way to promote climate or faith-based goals. Hart and Zingales write that “If proxy advisors are paid on the basis of the number of clients who choose to follow their advice, competition is likely to lead to a broad range of ‘political platforms.’” However, not all are sanguine about proxies’ practices and proposals.
Professor Sarah Haan calls proxy voting profoundly undemocratic because it allows the aggregation of votes across holders and concentrates them into a single actor. Adding to this concern, finance professors David Larker and Steve Kaplan argued that ISS and Glass Lewis enjoy an unregulated duopoly of the proxy market, citing research that these firms lack transparency; that institutional investors are unduly influenced by such firms; and that their recommendations are not in the best interests of shareholders.
Some have tried to improve the voting process to rely less on ISS and Glass Lewis put democracy back into shareholder voting. Take entrepreneur Alex Thaler of Iconik, who at the Stigler Center’s shareholder democracy event in summer 2023 lamented that 88 percent of retail shareholders don’t vote, noting that institutional investors have voting technologies but retail investors don’t. To solve for this, he launched an automated personal shareholder voting platform to empower retail investors to make their voices heard.
In 2023, shareholder democracy even made its way into a hearing at the United States House of Representatives Financial Services Subcommittee on Oversight and Investigation. Their discussion helps us understand where the debate on proxy advisors stands. For example, committee chairman Bill Huizinga (R-MI) argued that the proxy advisors ISS and Glass Lewis evade lawful processes for Congress to make laws on Environmental Social and Governance (ESG), and instead pressure corporations to adopt extreme measures which otherwise would not garner popular support. Ranking member Al Green (D-TX) countered that the hearing was an overreach into corporate governance.
Not surprisingly, ISS defended proxies as a market-based solution to common corporate problems of costly information gathering and dissemination and claimed that there had been robust competition in the proxy market. Glass Lewis added that there is no legal requirement to use proxy advisors, but firms do so to reduce costs.
While all investors are increasingly aware of the role of proxy advisors, resisting their recommendations can be costly and litigious.Take recent examples of different sets of shareholders that have battled each other in the same company over voting on firm leadership, as has been observed with Glass Lewis and ExxonMobile. In the case of Walt Disney, ISS and Glass Lewis were at odds with Glass Lewis backing a board-takeover by activist investor Nelson Peltz. ISS, on the other side with investors like JP Morgan’s Jamie Dimon, Star Wars creator George Lucas, and Laurene Powell Jobs, supported Disney’s management and veteran CEO Bob Iger. In the end, ISS and Iger won the vote.
Disney and Exxon may be the most high-profile examples, but proxy advisors are increasingly using their influence to elevate activist investors across the economy at public companies of all sizes.
Consider how ISS and Glass Lewis have supported hedge fund Politan Capital in its mission to oust the founder/CEO of medical device company Masimo. Politan argues that Masimo’s shares are undervalued and accuses its current leadership of mismanagement and demands complete executive control. On paper, it’s hard to see where this mismanagement argument holds water. Masimo, which makes wearables and opioid addiction prevention and recovery devices, successfully challenged Apple for patent infringement of its blood oxygen measurement technology. CEO inventor Joe Kiani not only serves on the President’s Council of Advisors on Science and Technology but has submitted 4,000 patent applications (900 of which he is named inventor) on advanced signal processing, optical sensors, and wearable technologies that use light to measure blood oxygen.
The company’s impressive year over year growth is detailed in recent financial statements. Under Kiani’s leadership, Masimo has delivered positive health outcomes and financial returns. It’s hard to see how removing a successful leadership team would make Masimo a better performing, stronger company. The societal damage from lost health care innovation is clearly not incorporated into ISS and Glass Lewis’ recommendation. Discussion of proxy advisors isn’t going away, as they represent the classic principal-agent problem of conflict between firm managers and owners. Shareholders should proceed with caution and be skeptical of proxy advisors pushing for activist takeovers. The potential for unintended societal and shareholder consequences is real.
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Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
