The Capital Markets and Government Sponsored Enterprises Subcommittee today examined the role proxy advisory firms play in corporate governance and what can be done to reduce the complexity and increase transparency of the proxy system.
Proxy advisory firms are frequently hired by institutional investors, such as investment advisors and pension funds, to advise them on their voting decisions on matters appearing on proxies. The two largest proxy advisory firms control 97 percent of the industry.
In 2010, the Securities and Exchange Commission (SEC) sought public comment on the U.S. proxy system. The SEC concluded in a concept release that the proxy system is so complicated that "it is not generally understood by those not involved in the process."
In addition to the complexity of the process, questions about conflicts of interest and how proxy advisory firms formulate their voting policies have also been raised. Some proxy advisory firms have aligned with political activists pushing social and political agendas that are contrary to increasing shareholder returns.
"Proxy advisory firms have no duty to make voting recommendations in the best interests of shareholders and have no financial interest in the companies about which they provide voting advice," said Subcommittee Chairman Scott Garrett (R-NJ). "By exploiting the proxy system to push special interest agendas, proxy advisory firms and activist shareholders have increased the costs of doing business for many public companies and dis-incentivized private companies from going public, all without a corresponding benefit to investor returns."
Garrett added: "Proxy advisory firms have increasingly teamed up with unions, pension funds, and other activist shareholders to push a variety of social, political, and environmental proposals that are generally immaterial to investors and often reduce shareholder value."
In some cases, proxy advisory firms are given the authority to execute proxy votes on behalf of their clients. The SEC has acknowledged conflicts of interest may arise when proxy advisory firms both provide voting recommendations on matters subject to a shareholder vote while also offering consulting services to the company or a proponent of a shareholder proposal on the same matters.