About a month ago, the Securities and Exchange Commission (SEC) issued some clarifications about the duties of proxy advisory firms. They have a significant impact on how institutional investors vote their shares on proxy ballots. One thing regulators left unresolved was a petition started in April by business groups. They want the agency to rethink its resubmission thresholds for shareholder proposals that appear on the ballots.
In a post on the Washington Examiner, James R. Copland of the Manhattan Institute says these two issues intersect and that the SEC should rethink its rules about proxy advisory firms.
SEC: Proxy advisory firms earn little
Copland notes that proxy advisory firms like Institutional Shareholder Services (ISS) actually run their operations on a very thin margin. Of course institutional investors are required to cast informed votes, but they often don’t have the time or interest to learn about each issue in each company in which they own stock. This is where advisory firms come in.
Institutional investors outsource their proxy voting for a low cost. ISS holds about two thirds of the market in the proxy advisory business, and it has just barely $10 million in profits annually on $100 million in revenue. Because of how slim the budget of advisory firms is, he says the SEC rules about proxy advisors matter in a big way.
Proxy advisory firms influence votes
Despite their low profits, such firms actually have a significant impact on the outcome of many proposals. Copland cites one of their studies which shows that when “controlling for other factors in econometric analysis,” whenever ISS recommends that shareholders vote for a proposal, the shareholder vote increases, on average, by 15 percentage points. He said that in this way, ISS acts like it owns 15% of the whole stock market.
He notes that this percentage might not sound like very much, but it falls within the SEC resubmission rules. Currently, activist investors can propose nearly identical proposals on a company’s proxy ballot every year if 10% of shareholders keep voting for it. And because this bar is set so low, he said just a small number of investors who want to change who corporations do business are targeting ISS to convince the firm to back their proposal.
Companies can’t avoid some proposals
For example, in the area of environmentally friendly proposals, ISS is more likely than the median shareholder to back them. And in corporate disclosures about politics, ISS backs almost all shareholder proposals. None of them have “received the support of a majority of shareholders, over board opposition, at any Fortune 250 company.” However, they keep showing up because ISS supports them.
In the case of CVS Caremark Corporation (NYSE:CVS), between 65% and 72% of shareholders opposed a proposal about political spending disclosures between 2008 and 2013. That proposal was allowed to keep showing up, however, and Copland says it’s because ISS backs it, which means at least 10% of shareholders voted to put it right back on the proxy ballot each year.
Another example is at Exxon Mobil Corporation (NYSE:XOM), where between 68% and 74% opposed a proposal requiring the company to report on its greenhouse gas emissions. That proposal was on the ballot every year between 2007 and 2013.
Raising costs
Copland’s argument is that these proposals, which are brought by a handful of activists, ultimately cost most shareholders of the companies in question because they are brought repeatedly, requiring time and attention from the companies each year. He thinks the SEC should rethink the rules in order to “protect the average investor.”
