Issues & Insights

Time to Rein In Proxy Advisors

Older Americans who have built their nest eggs with a mix of investments including stocks are likely familiar with periodic proxy ballots that arrive in the mail. Publicly traded companies must allow shareholders to vote on certain changes or additions to their corporate operations and governance, and the proxy ballot allows shareholders to exercise that right.

Proxy ballots include information on corporate issues along with recommendations from the company’s Board of Directors. But increasingly, shareholders are receiving information from proxy advisors. These are firms that are not affiliated with a particular corporation but they seek to tell shareholders how to vote and it’s increasingly problematic.

There’s nothing inherently wrong with proxy advisors, but the practice intuitively raises a few red flags.

The first question — why an outside firm would tell shareholders how to vote on a particular issue involving a corporation — looms large, and it’s a legitimate question. But more troubling is that these advisory firms are not subject to an adequate level of oversight to make sure they have no conflict of interest and to ensure the accuracy of their research and analysis.

Corporations are subject to strict scrutiny by the Securities and Exchange Commission (SEC) when it comes to issuing proxy ballots and offering recommendations, providing the transparency shareholders need to make a wise decision. There’s also a common sense aspect of corporate proxy recommendations. Companies want to make money and they want their shareholders to make money. Seeing as how Boards of Directors have a legal, fiduciary obligation to make that happen, it only makes sense that their recommendations will be in the best interest of the company and the people who invest in it.

This isn’t necessarily the case with proxy advisors. Too often, shareholders have no idea whether the advisor has a conflict of interest that fuels their recommendation. While there may not be a conflict in all cases, a report by Nasdaq and the U.S. Chamber of Commerce identified, “rampant conflicts of interest that can impact the objectivity of voting recommendations made to institutional investors.”

Unfortunately, this problem isn’t going away. It’s actually getting worse. This same report found that, “of the companies surveyed, 10 percent identified significant conflicts of interest at proxy advisory firms, and 21 percent of those that did find conflicts brought them to the attention of the firms — a 7 percent increase from 2017.”

Along with a growing number of conflicts of interest, there are also concerns about the accuracy of the research proxy advisors promote in making their recommendations. A recent study by the law firm Squire Patton Boggs found that between 2016 and 2018, “there were 107 filings from 94 different companies citing 139 significant problems including 90 factual or analytical errors.”

At the core of this issue is the question of who is looking out for the best interests of shareholders. Corporations have an obligation to the SEC and the people who own stock in their companies. If this obligation is breached, somebody is going to jail. Proxy advisors, on the other hand, have no such obligation to us, and we usually have no idea to whom that advisor does have a fiduciary obligation.

These are serious problems for seniors who rely on their investments for retirement security. A proxy advisor with conflicts of interest, inaccurate research and no obligation to look out for the best interests of older shareholders shouldn’t be tolerated. Yet the largely unregulated proxy advisor industry goes about its business with little, if any, concern for the people whose votes they are trying to sway on corporate matters.

The SEC is currently taking a closer look at proxy advisors and whether they should fall under stricter guidelines. While we generally eschew the idea of enlarging a regulatory apparatus, this is one area that needs attention. The SEC should require greater transparency for these advisors. It’s the only way seniors can have the confidence they deserve to make smart decisions with their proxy ballots.

Jim Martin is the founder and chairman of 60 Plus. Paul Anuzis is president of the organization.

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