Proxy Advisors and Market Power: A Review of Institutional Investor Robovoting
Manhattan Institute, 2021
42 Pages Posted: 28 May 2021 Last revised: 29 Jun 2021
Date Written: April 22, 2021
In July 2020, the Securities and Exchange Commission (SEC) adopted a final Proxy Advisor Rule, establishing principles governing the conduct of proxy advisory firms, which help institutional investors execute voting on shareholder matters and advise them on how to vote their shares. The commission acted in response to growing concerns that two relatively small proxy advisory firms — Institutional Shareholder Services Inc. (ISS) and Glass, Lewis & Co. (Glass Lewis), each owned by private equity firms and together controlling more than 90% of the proxy advisory market — have assumed outsize influence over corporate voting matters. The commission’s new rule is intended to ensure that investment advisors are acting in the best interest of shareholders.
Among the issues implicated by the SEC’s Proxy Advisor Rule and concurrent Guidance Supplement is “robovoting,” whereby institutional investors mechanically follow a proxy advisor’s voting guidance without any independent review. In effect, an institutional investor transfers its fiduciary voting authority to a third party. Robovoting is a principal mechanism through which proxy advisory firms have assumed substantial influence over corporate shareholder voting outcomes.
This paper is the first empirical assessment of robovoting in 2020, which, owing to the timing of the annual corporate “proxy season,” fell wholly after the SEC announced its proxy-advisor rulemaking process in November 2019 but mostly before the SEC released its final rule in July 2020. Because institutional investors are forward-looking, we can expect that at least some of these investors adjusted shareholder voting policies and disclosures in light of the commission’s rulemaking procedure.
Nevertheless, among institutional investors that engaged in robovoting in 2020 — either wholly or as part of an apparent custom voting plan — most did not make adequate disclosures to investors of their proxy voting strategies. Some institutional investors did, however — including those that adopted a robovoting strategy during the year, consistent with the SEC’s proxy advisory rule. This report highlights those examples, which other institutional investors may wish to consider as templates for their own disclosure regimes.
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