Recent press articles would have you believe the Proxy Voting Agencies, such as ISS and Glass Lewis are hugely powerful entities determined to bring the corporate world to its knees(!) by forcing institutions to vote against director reappointments and pay for no reason.

As a result of such press and lobbying, including from the Business Roundtable in the US. The SEC are now planning to implement some restrictions on the reports published by the agencies and also the mechanism for shareholder resolution submissions. The changes are:

  1. Prior to a General Meeting, the agencies will potentially have to submit the voting advice report for review by the companies twice prior to it being released to their clients.
    The problem with this? Discussions between institutional investors and corporates can often occur right up to the deadline for votes to be cast. Time is critical. The proposals will slow the process down considerably, which is an issue during the busy proxy season when significant numbers of companies hold their AGMs.
  1. Shareholder resolutions currently can be resubmitted to the AGM if they have gained support of 3% of the shareholder base, rising to 6% in year 2, and 10% in year 3. The SEC propose to raise these thresholds to 6%, 15% and 30% respectively. If a resolution fails to reach that level of support then it cannot be resubmitted for 3 years. 
    So what? While this doesn’t sound terribly onerous, previous resolutions on matters such as climate change have typically started with very low support but eventually gained significant support to effect change over a matter of a few years (e.g. at Royal Dutch Shell).

Like many other institutional investors, we are not comfortable with these changes; time can be tight during the busy proxy voting season and we believe the focus on the agencies is misplaced.

While we can only comment on how ISS works (as that is the agency we use), we understand that others function in a generally similar manner. And whilst potential conflicts of interests between these agencies and the companies they issue reports on, can arise, these conflicts appear to be adequately managed.

The Proxy Voting Agencies policies and approach should simply reflect the requirements of their underlying clients. For instance, ISS undertake a comprehensive institutional questionnaire and engagement programme with investors annually. This is to ensure that their research is focussing on the right issues and that the voting recommendations are aligned with their client’s opinions. As a result and unsurprisingly, their recommendations correlate with the voting outcome at meetings!

As best we can tell, the Proxy Voting Agencies appear to be trying their best. If there is a fault with the system, it is with those institutions that blindly follow voting recommendations. This is where the SEC should be focussing their efforts.

We use Proxy Voting Agency research as one of the inputs into our decision making process. In 2019 Kames voted at 480 company meetings and we disagreed with the ISS voting recommendation 22% of the time. Each meeting we vote in is considered on a case-by-case basis and we come to our own conclusions. Quarterly reports are provided to clients so that they can be comfortable (or not) with our approach. As we have previously written, we take our stewardship responsibilities very seriously and this includes not shying away from voting against company management regardless of what the Proxy Voting Agencies tell us.

About the author

Miranda Beacham is Corporate Governance Manager in the ESG Research team. She is responsible for monitoring, engaging and voting of investee companies in line with our Responsible Investment Policy. She joined us in 1994 as a research assistant in the UK equity team and has 25 years’ industry experience*. Miranda studied Chemistry at Napier University and has the IMC professional qualification.  *As at 30 November 2019.

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