Who is Governing the Firm – Companies or Investors?

There’s no doubt that proxy voting is a time-consuming and often challenging process.

Proxy advisory firms saw a need to serve a new market by helping institutional investors navigate the vast amounts of proxy votes on a myriad of issues. Now, that market is both large and powerful. It’s dominated by Institutional Shareholder Services (part of private equity firm Genstar) and Glass Lewis (part of Alberta investment Management Corp.). Concerns over these firms’ conflicts of interest have been raised for some time now. Lately, a new issue has arisen – the question of who is governing the firm, the shareholders or the corporation? To be sure both have long been thought of as part of the corporate governance equation. Yet, ISS and Glass Lewis are arguing they are, literally, proxies for the investors while other organizations like the Business Roundtable are arguing they are working on behalf of the corporations and their CEOs. The backdrop of this question has been the recent proxy advisor legislation under former SEC chair Jay Clayton and current SEC chair Gary Gensler.

In July 2020 the SEC, under Jay Clayton, adopted amendments tightening the rules on proxy advisory firms – specifically mandating that proxy advisory firms include conflict of interest disclosures in their vote recommendation materials. This move has been seen as a win for the corporation as many CEOs have argued these proxy firms have too much power. But with the compliance date for the exemption conditions still months away, the sitting SEC chair, Gary Gensler and his staff, are considering a rethink of the July 2020 regulation with an eye toward not recommending enforcement of these rules. Some see this move as a win for the proxy advisors and investors.

This power tussle plays out in real time. Consider the loss of three board seats at Exxon in May 2021. Pressure from hedge fund Engine No. 1, which wanted new board directors who were more likely to address the need for a new strategy and more monitoring of climate change policy at the company – had the backing of large institutional investors like Blackrock, Vanguard and State Street but also support for specific director candidates from ISS and Glass Lewis. By all accounts the Exxon board has been refreshed by adding climate and renewable energy experts, rather than replacing ‘like with like’.

This is still an ongoing tension. Stay tuned as there will be considerable jockeying in the coming months about this fundamental question of corporate governance and the role proxy voting plays in it.

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