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A new letter by 24 state attorneys general highlights one facet of a growing problem – the outsize influence of proxy advisors in public equity markets. 

The AGs asked 25 large asset managers why their votes on important corporate governance matters deviate so much from the broader base of investors. Is it because they over-rely on the two major proxy advisors, Institutional Shareholder Services (ISS) and Glass Lewis, who tell them how to vote? And just why do two consulting firms – not shareholders themselves – exert so much influence over tens of trillions of dollars worth of corporate decision-making?

The genius of public equity markets resides, partly, in their breadth. Stock markets connect thousands of companies who seek financing with millions of investors seeking returns. Stock ownership grants voting rights. Real time stock prices demand accountability, encouraging growth and efficiency. 

Large asset managers, however, own so many stocks it’s difficult to keep track of their holdings. They employ consultants, known as proxy advisors, to help guide their shareholder votes on corporate policies and board of director seats. 

By an accident of history, just two consulting firms dominate this proxy market – ISS and Glass Lewis. Like other concentrated markets, in recent years the duopolists became juicy targets for political capture. Instead of giving their clients objective advice, the AGs and other critics charge that ISS and Glass Lsewis push agendas not aligned with shareholder value but with politics or other narrow special interests. 

The highest profile example of this capture by activists is environmental, social, and governance investing, also known as ESG. Over the last 10 years ESG campaigners often bludgeoned the proxy firms into casting votes favoring so-called green energy policies and directors instead of the companies’ bottom lines. 

The proxy firms thus serve as a potential chokepoint for achieving aims other than shareholder value. If activists capture one or both of the proxy firms, they can exert outsize leverage or even total control over companies. 

This is the strategy currently being deployed in a fight for control of the health-tech company Masimo. An innovator in both consumer and hospital health sensors, the company reports annual sales of around $2 billion and has a market value of $6 billion. Masimo is best known for its leading pulse and blood oxygen monitoring systems. In fact, founder and CEO Joe Kiani has battled for years in court over his contention Apple stole Masimo’s pulse-oximetry technology for the Apple Watch. 

Now, an upstart hedge fund called Politan has accumulated nearly nine percent of the outstanding shares and is seeking to wrest control of the company, including the ouster of founder-CEO Kiani. Politan already placed two members on the Masimo board but is seeking two more seats, and thus effective control, in a September 19 shareholder vote. 

Activist investors sometimes push companies toward more efficient performance or a different vision altogether. Shareholder votes exist for just such questions. Politan is of course welcome to vote its shares and make its case to other shareholders. But it’s not clear Politan has any plan or vision at all, and it brings no medical technology experience.

The bigger question is why ISS and Glass Lewis are weighing in on the side of a small activist hedge fund without much of a track record and no discernible strategy. Do the advisors know the source of the funds specially designated for this takeover? The public doesn’t. Some suggest it could be one of Masimo’s legal foes. If the proxy advisors had performed extraordinary due diligence and concluded the activists offered a superior plan for the company, a recommendation for change of control might be defensible.

In my experience, however, ISS and Glass Lewis rarely perform the type of deep, objective research outsiders assume. Instead, they too often tell clients what they want to hear, rely on surveys, or follow momentary fashions, such as ESG. This timidity also makes them vulnerable to activists, both political and predatory. 

Kiani, who founded Masimo in his garage in 1989 and holds more than 900 patents, still owns nearly 8.5 percent of the company, giving him a clear incentive to build shareholder value. It’s true the stock stagnated over the last few years, but Kiani committed to separating out the consumer business, which is the perceived weight on the share price. Some 300 employees, including the senior executive team, say they’ll leave Masimo if Kiani is purged. 

Imagine trusting disinterested, bureaucratic “advisors” rather than shareholders and a founder-owner himself. 

The “consultification” of finance, with its hyper-compliance mindset, is one reason public markets are in decline. In 1996, the U.S. boasted 7,300 publicly traded firms. But today that number is just around 4,300. We warned of this trend way back in 2016, and JP Morgan CEO Jamie Dimon highlighted the problem in his 2024 annual letter. Bank of America estimates compliance costs incurred solely to be a public company are $8-11.5 million per year. 

“Proxy” is in fact an increasingly apt description of public markets – we’ve too often outsourced our judgment.

Private markets, on the other hand, are thriving. Over the past two decades, the number of U.S. companies backed by private equity grew to 11,200 from 1,900. Those with a more entrepreneurial mindset – investors and executives who want to exercise, not outsource, judgment – can often find more freedom to operate as private companies. 

We’re fortunate that large pools of private capital allow many companies to avoid the high costs and inflexibility of public listing. But that doesn’t mean we should give up on making public markets more friendly to entrepreneurs and investors. 

Despite the strength of private markets, the magnitude of energy, computing, and infrastructure investments needed to get America out of its financial hole will require healthy public markets as well. 

Bret Swanson is president of the technology research firm Entropy Economics LLC and senior fellow at the National Center for Energy Analytics. From 2009 to 2024, he was trustee and chairman of the Indiana Public Retirement System (INPRS).  



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