Less than half of public companies, 39%, covered by proxy advisory firms’ reports to investor clients feel that the reports are “carefully researched and took into account all relevant aspects of a particular issue”, according to the Center for Capital Markets Competitiveness 2019 proxy season survey, conducted jointly with Nasdaq. Perhaps reflecting that lack of confidence, and the lack of engagement by proxy firms when a meeting is requested, the number of companies requesting engagement with proxy advisory firms is declining markedly:
- 30% of companies asked proxy advisory firms for opportunities to provide input both before and after the firms’ recommendations were finalized, down from 51% in 2017.
- 17% of companies formally requested a preview of vote recommendations, but only 39% of those requests were granted.
- 21% of companies pursued meetings with PAFs to discuss issues subject to a shareholder vote, down from 52% in 2017.
- Those requests were denied 60% of the time, up from 38% in 2017.
- 19% of companies identified significant conflicts of interest, up from 10% in in 2018.
- 16% of those highlighted such conflicts to institutional investors, 8% to the PAFs, and 7% to SEC staff.
- 58% of companies report being approached by ISS Corporate Solutions (ICS) during the same year in which they receive a negative vote recommendation.
- 19% have hired ICS for advice on structuring executive compensation plans, improving ESG ratings, gauging proxy advisory outcomes, or other corporate governance matters.
Interestingly, the SpectremGroup published a survey of 5,000 retail investors opinions on the SEC’s proposed rules. Approximately 80% of the respondents supported the elements of the rules related to company review and proxy advisory firms enhancing their conflict of interest disclosures. Conversely, departing SEC Commissioner Robert Jackson, stated in an interview the Financial Times that he has concerns that the proposed rules will insulate boards and management from shareholder criticisms.
While the survey has a pronounced viewpoint on these issues, it highlights the breakdown in communications between the proxy advisory firms and the issuers. It is not clear that proxy advisory firms are providing clear guidance on their review and engagement policies. For example, ISS only provides draft reports to constituents of the S&P 500 and only for annual meetings (this would certainly impact the survey respondents if they are not in the S&P 500). While ISS is generally willing to discuss issues with companies outside of proxy season, it is not entirely clear how the engagements are supposed to work or if they have any bearing on how ISS conducts its analysis. It will be important to monitor how the SEC’s proposed rules will affect proxy advisory firms in 2020. Should the rules be finalized, it will be important to insist proxy advisory firms provide explicit disclosure on how they will comply with the new rules.