The Problem With Proxy Advisors Like Glass Lewis And ISS

ValueWalk’s Q&A with Saul Anuzis, President of 60 Plus, an American Association of Senior Citizens. In this interview, Saul discusses his background, what the ISS and proxy advisory firms do, if Glass Lewis has a conflict of interest, the duopoly of ISS and Glass Lewis, how big proxy firms votes, if Elliott Management is improving corporate governance or making profit, if ESG firms are a scam, the lack of regulation of proxy advisors is harming pensioners and retail investors, SEC’s move on proxy reform, DOL should also regulate proxy advisors, and passing the Corporate Governance Reform and Transparency Act bill.

regulation of proxy advisors Glass Lewis

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Can you tell us about your background?

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Currently I serve as the President of 60 Plus, the American Association of Senior Citizens. As a 25-year-old non-partisan organization we advocate for senior citizens across the country working on issues at both the state and federal levels. Prior to my current role, I spent my career as a businessman in the telecommunications world. Additionally, I worked alongside Newt Gingrich at American Solutions and a number or prominent elected officials where I have seen firsthand the importance of advocating for America’s senior citizens.

What are ISS and proxy advisors and what do they do?

Proxy advisory firms are intended to supply unbiased research, data, and recommendations to guide institutional investors votes on proposals. While they provide an important service to the institutional investor community, proxy firms have faced significant criticism, including for a lack of transparency, frequently flawed analyses, unwillingness to engage with public companies and conflicts of interest that undermine their objectivity.

Institutional Shareholder Services (ISS) is one of the two biggest players in the market with its smaller rival, Glass Lewis. ISS’s business model unfortunately has clear potential for conflicts of interest, because it provides consulting services to the same companies it evaluates. Without additional SEC mandated disclosure, we are forced to simply trust that the company is appropriately dealing with these conflicts.

What about Glass Lewis do they also have a major conflict of interest?

Yes, Glass Lewis also has a potential conflict as its owned by the Ontario Teachers’ Pension Plan fund. OTPP is a substantial owner of many public companies with $190 billion in assets under management and has been actively involved in promoting a number of political initiatives.

Unfortunately, this causes potential problems. In one high profile incident OTPP publicly announced its opposition to a Board of Directors and within one day Glass Lewis followed suit, issuing a voting recommendation that was in opposition to the same Board of Directors. This may of course be coincidence, but it is none the less concerning.

Are there any other big proxy advisors of note besides ISS and Glass Lewis that are doing a bad job?

No, the industry is a duopoly and ISS and Glass Lewis service 97% of the market. The 2008 financial crisis showed first-hand the danger and challenges associated with concentrated power of this kind. Leading up to the crisis, three large credit rating agencies were responsible for the review and classification of mortgage-backed securities in the U.S. As we now know the lack of oversight that would have come with a more diverse industry, played a major role in not identifying the warning signals that preceded the collapse of the market. A significant concentration of power in any industry – particularly one that is unregulated and plagued with conflicts of interest – is dangerous for those that rely on it.

Can you explain how the big proxy firms like  Glass Lewis and ISS decide how to vote?

Proxy advisory firms typically develop a set of corporate governance principles for their clients and then evaluate every company in relation to that formula. Unfortunately, they frequently rely on an arbitrary, one-size-fits-all approach to assessing companies.

A big reason for that is that they simply aren’t resourced sufficiently to assess the tens of thousands of companies they cover. For example, in 2016 ISS had a global staff of 370 full time employees to cover more than 40,000 shareholder meetings, while Glass Lewis had 360 employees – only half of whom were research professionals – to cover 20,000 shareholders meetings.

I’m sure there are some very smart analysts at these firms, but they would need to be superhuman to sufficiently review all those proposals. This is why only 39% of companies surveyed believe that the proxy firms carefully researched issues facing their company. It’s really rather ironic that good corporate governance types put so much faith into what amounts to a sophisticated box ticking exercise.

What are your suggestions for improving the process?

A large number of shares are often voted by investment advisers immediately after a proxy advisor issues a recommendation. This is because many fund managers appear to automatically default to vote in line with ISS and Glass Lewis’s recommendations, a practice that has been dubbed robo-voting.

According to recent SEC guidance, robo-voting is likely a breach of fund managers’ fiduciary duty to ensure they execute shareholder votes in their clients’ best interests - a process that would require them to actually assess each resolution on its merits. As proxy advisors are also not necessarily fiduciaries, we have a situation where there is no guarantee that retail investors’ interests are actually being protected by those who are managing their money.

Clearly, it’s a major concern that pensioners like 60 Plus’ members, have effectively been disenfranchised. I hope the recent SEC guidance will push fund managers to take additional steps to meet their fiduciary duty, but I do think that the Commission also needs to disable robo-voting in a formal regulation.

What role do the giant asset managers who own a decent stake in almost every stock like BlackRock, StateStreet, and Vanguard play here?

Academic research suggests that certain investors do robo-vote. But it’s important to recognize that it’s not the entire market.

Some of the larger fund managers like BlackRock have invested heavily in building out their own corporate governance teams. These companies conduct due diligence on how they vote their options and use proxy advisory firms guidance the way it was originally intended; as a single, non-definitive source of information that helps inform their own assessment.

BlackRock has actually indicated that reform to bring additional transparency to proxy advisors would be a good thing, so I am hopeful the SEC will take note.

What about aggressive activists like Elliott management? Are they helping improve governance or just making profits for themselves?

Firms like Elliott acquire large stakes in companies that they think are undervalued and then use their positions to influence management teams and attempt to increase the value of their holdings. In contrast activist investors aim to use the shareholder proposal process to push companies to implement societal changes that may not be linked to value maximization. That’s problematic as most investors’ primary objective is to increase the value of their holdings.

How about so called ESG firms - I believe most are marketing scams but has the ESG/SRI movement helped lead at all to better governance?

There’s nothing inherently wrong with ESG, so long as resolutions and investments are tied to wealth maximization. But at this point the evidence that they do is moot at best. For example, a study by Harvard economist Joe Kault found that ESG proposals had a net negative impact on the companies targeted.

Research shows that proxy firms have played a major role in promoting these kinds of initiatives. Law firm Sullivan & Cromwell found that ISS supported 74% of social proposals in 2018, including 94% of political-spending proposals and 87% of environmental proposals.

Why is proxy reform of firms like ISS and,Glass Lewis a priority for the SEC? They are understaffed and dealing with a lot of important issues like outright fraud - why should they deal with ESG/activist/proxy advisor issues instead of more important ones?

A variety of academics, think tanks, companies and groups like 60 Plus have been calling for more oversight of proxy advisors for at least a decade. These issues have only grown more acute as more and more retail investors rely on institutional investors to manage their assets and as ESG proposals have grown in popularity, increasing the importance of making sure that the corporate governance system is actually working.

As I understand it, SEC Chairman Jay Clayton has set the Commission’s agenda to protect the interests of main street investors. The lack of regulation of proxy advisors is a key area where pensioners and retail investors are exposed to actors who are not necessarily acting in their best interests.

The SEC did in fact make a big move on proxy reform can you tell us what happened there?

The SEC issued guidance clarifying investment advisers responsibilities during the proxy process. These included confirming that they are not actually required to vote all of their securities and can ignore those that they don’t think will have a material impact on the company – a critical method of reducing the demands on fund managers. The SEC also clarified that they consider the proxy advisors’ recommendations a solicitation and are therefore subject to anti-fraud provisions of existing rules, helping to ensure that proxy advisors are accountable for factual errors in their analysis.

While this is an important step in the right direction, more work is needed. The guidance only clarifies the SEC’s intent behind existing regulations and new rules are needed to require proxy advisors to adequately disclose conflicts of interest, implement sufficient processes to address analytical and factual errors in their reports, disable robo-voting and make company feedback available to investors.

Do any other regulators besides the SEC play any role here like FINRA, FCTC, FED or DOL any of those - if so what?

The Department of Labor should also regulate proxy advisors who provide recommendations for private employer benefit plans, an important part of many senior’s retirement plan. The DOL has long held shareholder voting as part of a plan manager’s fiduciary duty under ERISA. Under ERISA, plan managers are also obligated to make decisions solely with the intent of maximizing shareholder wealth. Bernard Sharfman, a legal scholar in this area recently published a compelling paper that really lays out the case for this action, which I recommend reading.

If you could pass one corporate governance-related legislation as President or SEC commissioner what would it be?

That’s easy, I would pass the Corporate Governance Reform and Transparency Act, which is a bill that passed the House of Representatives last Congress. If enacted, that bill would thoroughly address all the issues we’ve been talking about regarding conflicts of interest, robo-voting and fiduciary duty. However, the SEC action we’ve seen to date has been very encouraging and I am eagerly waiting for the SEC to release a proposed rule.




About the Author

Jacob Wolinsky
Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Prior to ValueWalk, Jacob was VP of Business Development at SumZero. Prior to SumZero, Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver