A Close Look at Proxy Advisors

This summer, the U.S. Government Accountability Office released its long-awaited report on the state of the proxy-advisory industry. The report, which was requested by members of Congress, looked at whether or not proxy advisory firms have conflicts of interest that could skew the objectivity of their vote recommendations. The report, which runs 28 pages, also looked at the factors that may impede or promote competition in the industry. According to the findings, the Securities and Exchange Commission did not identify any major violations in its examinations of such firms.

At the heart of the matter is the contention that because some proxy advisory firms, such as Institutional Shareholder Services (ISS), provide consulting services to companies seeking to improve their corporate governance, they cannot be objective in how they advise shareholders to vote proxies related to the firms with which they do business. “ISS’s critics also contend that this could lead corporations to feel obligated to retain ISS’s consulting services in order to obtain a favorable proxy vote recommendation,” the GAO stated in the report.

“I thought the report was balanced and fair,” says Patrick McGurn, executive vice president and special counsel at ISS. “The GAO interviewed a significant number of institutional investors, including many of our clients, concerning their voting practices. As a result, the GAO's conclusions reflect the reality of the proxy voting landscape.”

Of the five major proxy advisory firms, ISS, Marco Consulting Group, and Proxy Governance Inc. are registered with the SEC as investment advisers and are subject to agency oversight. The other two firms, Glass Lewis and Egan-Jones, are not. The GAO report found that, while ISS holds a dominant position in the industry—it is larger than the other four combined—it does not compete unfairly. It found that there have been recent entries into the market that have tried to differentiate their services from ISS.