In the investment industry, there is a little-known subsector that wields an outsized amount of power given the level of attention it receives. Proxy advisory companies are independent firms that provide data, research and recommendations to investors on how to vote on shareholder resolutions and corporate governance decisions. While proxy advisors can provide advice to retail investors, their major influence largely derives from their influence over institutional investors.
Two firms, Glass Lewis and Institutional Shareholder Services (ISS) account for an estimated 90 percent market share, according to an updated paper in the Journal of Financial Economics. ISS covers more than 50,000 shareholder meetings annually, while Glass Lewis covers more than 30,000 across 100 global markets, effectively serving as a duopoly. While this market could certainly benefit from more competition, Securities and Exchange Commission (SEC) rulemaking that makes it easier for irrelevant proposals to go to a vote is also worthy of scrutiny.
The proxy voting process is costly and demands significant costs and time for investors. As such, independent proxy advisory firms fill a market demand for those funds that cannot expend significant resources on shareholder voting. Additionally, expansive SEC rulemaking has resulted in an historic increase in shareholder proposals, while SEC rulemakings have encouraged proposals that are outside the scope of a company’s core mission. In 2021, the SEC—under Chairman Gary Gensler—published staff legal bulletin 14L, which allows shareholder proposals that “raise issues of broad social or ethical concern related to a company’s business.”
Social impact investing has been around for decades, and there is value in the marketplace for investments that align with environmental, social and governance (ESG) characteristics. and asset managers respond to that value proposition. The excesses of advocates and detractors of ESG can obscure the role a properly functioning market can play in allocating capital across the economy – to include ESG-aligned investments. However, the proxy advisor duopoly has made a point of supporting more shareholder resolutions aligned with the ESG principles that many conservatives have recently placed in their crosshairs.
The increased focus on ESG has mostly been pinned on banks and institutional fund managers. But, in the wake of the state and nationwide backlash, asset managers such as BlackRock and Vanguard have been fairly responsive to these views and decreased their support for the criteria.
For example, in its 2023 annual stewardship report, BlackRock supported 7 percent of 399 shareholder proposals on environmental and social issues, down from 22 percent the year prior, and 47 percent the year before that. Likewise, Vanguard funds supported just 2 percent of environmental and social shareholder proposals in the same cycle, down from 12 percent the year prior. These voting records accord with larger trends at the firms. In 2022, BlackRock announced its Voting Choice program, “to make participation in the proxy voting process easier and more accessible,” for eligible clients. The asset manager has since expanded the program, offering clients a slew of options for third-party voting policies, such as those tailored to “Catholic values,” or “union pension funds.”
Recently, BlackRock announced the addition of Egan-Jones to its program, a leading provider of guidance, voting, and reporting solutions. Egan-Jones will add two new proxy policies to the existing 14 in the Voting Choice Program, one of which seeks to “protect and enhance the wealth of investors” and “does not prioritize environmental or social goals.” Although the service has a smaller market share than Glass Lewis and ISS, the move signals a new responsiveness by investors to their clients’ desire to step away from the duopoly’s vice-grip.
The market is responding to Glass Lewis and ISS’s over-emphasis on ESG. Major asset managers, who have borne the brunt of recent criticism are responding to their clients and critics, while those dominating the proxy advisory industry are not.
In order to address these issues, changes are needed on both a market and regulatory front. More institutional investors should explore alternative options to the duopoly, while overly proscriptive SEC rules ought to be reevaluated to ensure they serve market participants as intended. Only then will the proxy advisory industry change to meet Americans in the middle.
