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Undermining proxy-voting advice

A bill pending in Congress would undermine proxy-voting firms and consequently weaken the capability of asset owners and other institutional investors to bring to bear their crucial resources to assist in voting on proxy issues at publicly traded companies.

Asset owners and other institutional investors should engage congressional members as well as the leadership to oppose passage of the bill, HR 5311, Corporate Governance Reform and Transparency Act.

By a vote of 41-11, the House Financial Services Committee passed the bill on June 16. The legislation now goes to the full House for a vote, which has yet to be scheduled.

Congress should defeat the measure. Enacting it would raise costs significantly, harming proxy advisory firms and the ability of new firms to enter the market.

The bill would require proxy-voting advisory firms to let companies preview their analyses and recommendations. It would turn the proxy advisory firm toward serving corporate interests rather than shareholder interests.

Under the bill, such checking would allow companies to ensure the “reliability” of any analysis by a proxy advisory firm. The bill requires proxy advisory firms to provide draft recommendations to the companies in question within a “reasonable time” to enable the companies an opportunity to respond to the recommendations, including to enable the companies prior to the voting to communicate directly with the proxy advisory firm's analysts directly responsible for making the recommendations.

Each advisory firm would have to employ an ombudsman to receive complaints from companies about the “accuracy of voting information used in making recommendation,” and shall resolve those complaints before the voting takes place.

The requirement would challenge the ability of proxy advisory firms to produce timely analysis and recommendations for its institutional investor clients.

The Council of Institutional Investors opposes the bill. Many of its members are clients of proxy advisory firms. If the CII believed the bill would enhance corporate governance and performance, its membership would turn out in support of the legislation.

The House should be concerned about improving the proxy process and seek to remove any barrier to entry into the business for proxy analysis to enhance competition in the U.S. marketplace for proxy advisory services now dominated by Institutional Shareholder Services and Glass Lewis & Co.

But the House committee at least clearly has no such motivation in mind but rather to weaken it to the detriment of asset owners and risk to corporate performance. n

This article originally appeared in the June 27, 2016 print issue as, "Undermining proxy-voting advice".