September 21, 2018
On the heels of the SEC’s revocation of two influential staff interpretations, a Wall Street Journal editorial this week assailed the proxy advisory firm “duopoly,” noting the influence of the firms far surpasses that of activist investors and posing the question: “Why are the two most influential voices in corporate America immune from accountability or transparency?”
The news of the revocation of both the Egan-Jones and ISS no-action letters sent shockwaves far and wide with a myriad of commentators discussing the impact of the announcement. The Wall Street Journal Editorial Board praised the SEC for its decision calling it “overdue.”
The two no-action letters provided a safe harbor from a 2003 SEC rule that requires institutional investors to develop and disclose proxy voting policies. As the editorial notes, the letters allowed investors to effectively outsource that duty to “independent” third parties as a safe harbor, even though proxy advisory firms do not have a fiduciary duty to shareholders.
The revoked letters solidified proxy advisory firms’ status as “independent” third parties, protecting investors from lawsuits alleging conflicts of interest. However, as the editorial board notes, proxy advisory firms suffer from obvious conflicts of interest, and yet they were effectively sanctioned by the SEC’s no-action letters.
72 percent of publicly traded companies purchase consulting services from proxy advisory firms on executive compensation, according to a 2012 study cited by the editorial, perhaps because it has been found that an ISS no vote recommendation carries significant influence among investors. The conflict of interest stemming from ISS’s sale of consulting services alongside “independent” rating of proxies is the worst example of a conflict.
More to come: Revocation of the no-action letters is the “first step” to addressing proxy advisory firms according to the SEC, which is expected to announce soon the date for a public “roundtable discussion” on proxy issues in November, including SEC oversight of proxy advisory firms. The Association’s Center On Executive Compensation will submit comments to the SEC in advance of the roundtable.