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A question of influence: how much sway do proxy advisers actually hold?

By Jessica Tasman-Jones

It is hard to exaggerate the influence of proxy advisers, says investor Michael Moritz.

Angered at the shareholder revolt at Apple over the $99mn pay packet for chief executive Tim Cook, Moritz, a partner at Sequoia Capital, argues that Institutional Shareholder Services and its smaller rivals have “become judge and jury for the actions of corporate America”.

As a result, Moritz says companies should hire directors who will be willing to ignore the “browbeating” from agitators. He also says chief financial officers should seek investors who “rely on their own analysis”.

On the issue of CEO pay, 71 per cent of directors believe proxy advisers have too much influence, according to a London Business School paper last year.

There is understandable frustration, says Roger Barker, director of policy and governance at the Institute of Directors, but he argues that the existence of ISS and its peers is a symptom of the problem rather than the cause.

Share ownership is now dominated by global institutional investors who often lack the in-house capacity to act as effective stewards of the thousands of companies in which they hold equity stakes, he says.

“And yet policymakers and regulators expect such institutions to play an engaged role as responsible business owners.” The cost-effective solution for many institutions is to outsource stewardship responsibilities, Barker says.

ISS plays down its influence. In 2021 it recommended voting against 12 per cent of say-on-pay resolutions for the top 3,000 US companies. Only 3 per cent failed to pass. “These numbers underscore [the fact] that investors make up their own minds,” the company said, pointing out that ISS provides advice and recommendations but cannot dictate what its clients do.

Independent analysis backs up claims that the influence of proxy advisers can be overstated.

In 2018, PwC examined UK data and found that an ISS recommendation against the board affected between 10 to 15 per cent of votes. This was much lower than the 35 per cent often touted, although the influence was stronger among investors with smaller stakes, also known as the “tail” of the share register.

While ISS provides recommendations on how its clients should vote, many of its peers simply provide research. It is also common for asset managers to create bespoke voting policies that proxy advisers then implement.

The industry provides a service that no one is obliged to buy and this makes the AGM season more manageable, says Sarah Wilson, chief executive at Minerva Analytics, a proxy adviser.

Research from the Investment Association carried out in 2018 shows that nine out of 10 asset managers rely mainly on in-house capabilities to carry out engagement and voting, although 84 per cent complement this with research from proxy advice services. Legal & General Investment Management, for example, the UK’s largest asset manager, says ISS research “augments” its in-house environmental, social and governance research.

“Mr Moritz seems to be very happy to express his opinion about others who express theirs, which is just as it should,” Wilson says. “However, the facts of proxy advice are that our research is commissioned by shareholders whose views are paramount.”

Moritz’s suggestion that boards should ignore proxy advisers reflects “a capitalist mentality of many decades ago”, says Konstantinos Sergakis, professor of capital markets law and corporate governance at the University of Glasgow.

If anything, more voices are joining the fray, he says. BlackRock is this year expanding the ability of its clients to vote on their holdings, as is Interactive Investor, the retail investment platform. At the same time, fintech companies such as Tumelo allow individuals to advise their pension providers on how they would like to vote.

For boards, engaging with proxy advisers is complicated by the fact that the industry is reluctant to be drawn into a role negotiating on behalf of investors, says Tom Gosling, executive fellow at London Business School.

However, it is still worth pursuing a dialogue to understand what items will be particularly important to the proxy adviser and to ensure that they understand the issues correctly. September to December – the “off-season” before most companies hold their AGMs – is the best time to do this.

Boards have three options if a proxy adviser recommends a vote against the company, says Gosling.

First, a common approach is to spend the busy period in the lead-up to the AGM shoring up support among shareholders, but this takes time and it can leave investors feeling as if they have been browbeaten into voting in the company’s favour.

Second, a board may change its recommendation to appease a proxy adviser. This, however, can alienate investors who may feel they have not been treated the same.

Third, boards may choose to do nothing, particularly where a revolt is likely to be concentrated in the tail of the share register.

Companies have six months from a vote that registers dissent of more than 20 per cent to file a response to markets under the UK Corporate Governance Code.

It might be tempting to blame a low vote on the proxy recommendation, but if major shareholders vote against management that is unlikely to be the cause, Gosling says.

“Instead it is more likely that they shared the same view as the adviser. I have seen cases where boards were too ready to blame the recommendation rather than being honest with themselves that they’d done something that shareholders didn't agree with.”

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