Proxy Advisors Lose the Gift of Power
September 13, 2018 was an important date in the world of executive compensation. On this date the SEC withdrew two critical letters written in 2004. The letters have basically allowed investment advisers to vote however proxy advisors recommended they should vote. This may not seem like a big deal to those outside of executive compensation, but it is a potential game changer.
Proxy advisory firms like ISS and Glass Lewis have built much of their influence on these two letters. This influence has chaffed Boards and executive teams, it has been shown to often have questionable shareholder value and has brought some of these firms millions of dollars in consulting fees. With one simple statement, the SEC may have changed all of that.
Here’s the skinny. Investment advisers have a fiduciary responsibility to their clients. This means they have an obligation to act, and vote, in their clients best interests. The letters let advisers meet this responsibility by blindly voting however the proxy advisers recommended. It was easy. It was fast. It was protected (kind of.) Most of all it was generic and required no real thought or research. The advisers may have put some time into the big, media worthy companies, but the smaller companies were often voted along “party lines.” This often resulted in confusion and angst on the part of companies and poor results for clients.
Before this letter, even small companies could effectively engage the investment advisers for their stock. After these letters and the rise of the proxy advisory firms, this outreach was often less effective, and sometimes a complete waste of time.
So, what does this mean in an already turbulent time for executive compensation? I don’t know, but I will make some guesses.
1. Proxy advisory firms may provide more information about some of their “black box” (secret and almost impossible to reverse engineer) calculations.
2. Companies with unique and defensible differences from the norm may get more traction when making their case.
3. Some investment advisers will become more focused on fewer companies and remove the burden of learning so much about so many.
4. Past generic approaches to executive compensation will see more color (at least around the edges). There will be less focus on lock-step compliance to ISS and Glass Lewis rules that will allow different decisions, both good and bad.
5. Mostly nothing. At least not in 2019. While this is fun to discuss, most companies will not be challenging the status quo. They will let a few brave peers test the waters and see if they are destroyed by some sort of Kraken.
I have also provided some links below to other thoughts on this issue. (Cooley, The Corporate Counsel, World at Work.) I am sure there will be more to come after the SECs November 15, 2018 Roundtable on the Proxy Process. Come back and visit sometime around Thanksgiving to another update!