Proxy Rights: Who Holds The Power In Investment Management?

Investment managers do hold proxy rights. Proxy voting is a key part of environmental, social, and governance (ESG) investing, and these shareholder votes are an investor's chance to channel their inner activist investor.

A proxy is an agent legally authorized to act on behalf of another party. Proxy voting allows shareholders to vote on the composition of the company's board, the compensation of its officers, and the company's accounting firm. It also allows voting on shareholder proposals.

Proxy voting is often the sole means by which investors can have a say in the business operations and societal activities of their company or mutual fund. Shareholders need not attend an important meeting in person, but they certainly must make the effort to read and understand legal resolutions and use all available resources to make an educated vote based on their best knowledge and information.

Proxy voting by investment advisers is governed by the Securities and Exchange Commission (SEC). The SEC has issued guidance on the responsibilities of investment advisers in voting client proxies and retaining proxy advisory firms.

The SEC has also provided guidance on the availability and requirements of two exemptions to the federal proxy rules that are often relied upon by proxy advisory firms.

Proxy voting is a key part of ESG investing

Proxy voting is the primary means by which shareholders can influence a company's operations, and it is especially important for investors to participate in proxy voting to make decisions based on a full understanding of the information and legal documentation presented to them.

In the era of ESG investing, investors have become increasingly active in trying to drive support for ESG-related policies. As shareholders in a large company, investors are able to participate in a process called proxy voting, where they have the opportunity to submit a shareholder proposal or vote on other proposals on topics that are important to them.

Proxy voting allows investors to vote when they can't attend a shareholder meeting. In the internet age, investors can not only buy and sell stocks online but also vote their proxy statements. The entire documentation delivery process can be electronically automated.

Proxy voting is often the sole means by which investors can have a say in the business operations and societal activities of their company or mutual fund.

However, some investment managers may be reluctant to change their behaviour to fully comply with the law. This may be due to the fact that many investment institutions have come to embrace ESG investing and now market a number of fee-generating ESG portfolios.

It is important for shareholders to participate in the voting and make their decisions based on a full understanding of the information and legal documentation presented to them.

Shareholders can vote by mail, phone, or online

Proxy voting allows shareholders to vote when they can't attend a shareholder meeting. This means that investors can own and vote on equities in companies and mutual funds that might be located and registered across the globe.

Shareholders will receive a package in the mail containing a proxy ballot and an information booklet called a proxy statement, which describes the issues to be voted on during the meeting. This package will also include an annual report and a proxy card or voting instruction form.

Proxy votes may be cast by mail, phone, or online before the cutoff time, which is typically 24 hours before the shareholder meeting. Responses may include "For," "Against," "Abstain," or "Not Voted."

Proxy statements include information such as annual reports and board member bios

Proxy statements are documents that contain information that the Securities and Exchange Commission (SEC) requires companies to provide to shareholders. They are filed ahead of an annual meeting and include information such as:

• The company's voting procedure
• Nominated candidates for its board of directors
• Compensation of directors and executives
• Any potential conflict of interest between the company and its directors, executives, and auditors
• Annual reports
• Board member bios

Proxy statements are different from proxy votes, in which a shareholder agrees that another person can vote on their behalf.

Shareholders can submit proposals on ESG and sustainability issues

On the one hand, there are those who support ESG and sustainability issues. They argue that proxy voting is often the sole means by which investors can have a say in the business operations and societal activities of their company or mutual fund. They believe that shareholders should make the effort to read and understand legal resolutions and use all available resources to make an educated vote based on their best knowledge and information.

On the other hand, there are those who oppose ESG and sustainability issues. They argue that proxy voting is cumbersome and that it is cheap and easy to pay little attention to proxy votes. They also believe that there is no easy method to discern the relative effectiveness of various funds or that there ever will be.

In 2020, the SEC issued a rule requiring more disclosure from proxy advisors and provided additional guidance to investment managers intended to curtail the practice of allowing proxy advisors to vote the proxies for an investment manager without consulting them. This was done in response to concerns that some investment managers were completely turning over the task of proxy voting to these firms without taking steps to discern whether these firms are voting in the best interest of their clients.

A study by Paul Rose, a law professor at the Ohio State University, found that investment advisers appear to be reluctant to change their behaviour to comport with the law. However, the fact that relatively few investment management firms felt compelled to expeditiously adopt the guidance recommendations suggests that there is a degree of ambivalence on their part to such a change.

Proxy advisory firms such as ISS and Glass Lewis provide analysis of items up for vote

Proxy advisory firms, such as ISS and Glass Lewis, provide analysis of items up for vote. They help institutional investors execute voting on shareholder matters and advise them on how to vote their shares.

ISS and Glass Lewis are the two major proxy advisory firms, controlling over 90% of the proxy advisory market. They have an outsized impact over shareholder votes even though they own no shares.

In 2020, the Securities and Exchange Commission (SEC) issued a final Proxy Advisor Rule, establishing principles governing the conduct of proxy advisory firms. The rule was intended to ensure that investment advisors are acting in the best interest of shareholders.

The SEC's Proxy Advisor Rule and concurrent Guidance Supplement is concerned with "robovoting", whereby institutional investors mechanically follow a proxy advisor's voting guidance without any independent review. In effect, an institutional investor transfers its fiduciary voting authority to a third party. Robovoting is a principal mechanism through which proxy advisory firms have assumed substantial influence over corporate shareholder voting outcomes.

In 2020, 114 institutional investors voted in lockstep alignment with either ISS or Glass Lewis: 86% of robovoting investors used ISS and 14% used Glass Lewis. Robovoting institutional investors managed collectively more than $5 trillion in assets.

The SEC's Proxy Advisor Rule and Guidance Supplement have resulted in some changes to robovoting behaviour. Some institutional investors have updated their proxy policies to vote independent of their proxy advisor. However, many investors that did not robovote in line with a proxy advisor in 2019 did so in 2020.

Some institutional investors that have engaged in robovoting in 2020—either wholly or as part of an apparent custom voting plan—have not made adequate disclosures to investors of their proxy voting strategies. However, some institutional investors have provided examples of more transparent disclosures, which other institutional investors may wish to consider as templates for their own disclosure regimes.

The SEC's Proxy Advisor Rule and Guidance Supplement have not fully taken effect yet, so it is too early to tell what their full impact will be. However, the modest trend away from robovoting in the 2020 proxy season may or may not portend more such movement in the future.

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