Corporate Governance Oversight and Proxy Advisory Firms

Abstract

The Securities and Exchange Commission requires that investment management funds submit proxy votes for all companies in which they own shares. Due to the vast number of stocks held by the typical institutional investor, hedge fund, or mutual fund, most of these investors draw on the research of a proxy advisory firm, which provides them a modicum of guidance in their task and allows them to focus on managing their portfolio. But while their clients want to maximize returns for their investors, the objectives of proxy advisory firms may not be completely aligned. The opacity with which they operate makes it difficult for investment management companies – and indeed individual shareholders – to discern the truth. Proxies have become increasingly contentious in recent years as political activists have leveraged shareholder proposals, determined to pursue their political goals in a variety of ways that circumvent legislation or regulatory activities. Proxy advisors, in turn, have themselves become more political in their support of these shareholder proposals. Accordingly, these activities have been receiving closer scrutiny – especially from Congress, which is currently debating legislation to increase transparency at proxy advisory firms. The SEC has also declared its concern with political activism in proxy voting and may pursue further action in this area as well.