Proxy firm

A proxy firm (also a proxy advisor, proxy adviser, proxy voting agency, vote service provider or shareholder voting research provider or proxy voting advisory businesses (PVABs)) provides services to shareholders (in most cases an institutional investor of some type) to vote their shares at shareholder meetings of, usually, listed companies.

The typical services provided include agenda translation, provision of vote management software, voting policy development, company research, and vote administration including vote execution. According to their websites, not all firms provide voting recommendations and those that do may simply execute client voting instructions.

The votes executed are called "Proxy Votes" because the shareholder usually does not attend the meeting and instead sends instructions - a proxy appointment - for a third party, usually the chairman of the meeting to vote shares in accordance with the instructions given on the voting card.

Industry regulation

In the United States, on July 22, 2020, following years of complaints and lobbying by issuers and their associations about the role and influence of some proxy research firms, the SEC voted to regulate of proxy research firms.[1] Issuers had alleged that proxy research firms were exercising undue control over substantial parts of the annual meeting vote thereby effectively forcing issuers to purchase expensive consulting services should those same publicly traded companies wish proposals on executive compensation and similar issues to receive a positive vote. However, in 2022 the SEC adopted certain amendments that rescinded those rules, including:

In the United Kingdom, to achieve compliance with the Shareholders Rights Directive, proxy advisors are required to be listed on the Financial Conduct Authority's website.[2]

• Rule 14a-2(b)(9)(ii), and related safe harbors and exclusions, which provided proxy voting advisory businesses with two conditions for exemption from the proxy rules’ information and filing requirements:
• PVABs must make their advice available to the companies that are the subject of their advice at or before the time that they make the advice available to their clients; and

Global industry

Firms in the industry include:

• Egan-Jones Proxy Services, part of Egan-Jones Ratings Company (United States)[3]
• Glass, Lewis & Co (United States)
• Institutional Shareholder Services (United States) [4]
• Institutional Investor Advisory Services India Limited (IiAS) (India)
• IVIS (United Kingdom)
• Minerva Analytics Ltd (United Kingdom)
• PIRC Ltd (United Kingdom)

Controversial role

The role of proxy firms has come under considerable scrutiny in recent years, most notably from the corporate lobby in the United States.[6][7]

In 2013, the US Securities and Exchange Commission fined ISS $300,000 for revealing non-public information in respect of clients proxy votes.[8]

In May 2018, the Rock Center for Corporate Governance at Stanford University published an overview of the Proxy Advisor industry authored by J. Copland, D. Larcker and B. Tayan.[9] Some of the most concerning key findings of this report include:

The researchers conclude that the industry exhibits signs of market failure, in that despite their demonstrated poor track record and questionable practices, the market has not been able to gradually eliminate them and they have in fact thrived.

These findings stand in contrast to the

Conflicts of interest

A potential conflict of interest identified by the Government Accountability Office is that some owners of proxy firms do business with both issuers and investors.[10] Analysis of executive remuneration, or executive pay, is a notable feature of the work of shareholder voting research.[11] Some policymakers believe that increasing competition in the industry may improve service quality. For example, in 2010 a Securities & Exchange Commission consultation document asked whether certain issues in the proxy advisory industry, including conflicts of interest, are affected by limited competition.[12]

In April 2019, Glass, Lewis & Co controversially did not recuse itself from issuing voting recommendations in a proxy contest at Knight Therapeutics, a Canadian company. In advance of the May 7th, 2019 vote, Glass, Lewis & Co sided with the slate of nominees which included Kevin Cameron, a co-founder and past senior executive at Glass, Lewis & Co itself. This precedent could encourage future activist shareholders to include past proxy advisor senior executives in their nominee slates to unfairly obtain favorable recommendations.[13]

Code of conduct

Following a number of regulatory reviews by securities regulators, including the Canadian Securities Administrators[14] and the European Securities and Markets Authority (ESMA)[15] a number of firms have published a Code of Conduct: the Best Practice Principles for Shareholder Voting Research.[16] The Code was developed with an independent chairman, Dr Dirk Zetsche, Propter Homines Chair for Banking and Securities law at the Institute for Financial Services of the University of Liechtenstein and Director of the Center for Business & Corporate Law at Heinrich Heine University in Duesseldorf/Germany.[17]

See also

• Proxy statement