Government Accountability Office Report on Role of Proxy Advisory Firms Underscores Senate Interest in the Enhanced Oversight
December 02, 2016
The Government Accountability Office (GAO) has released a report noting that the role and influence of proxy advisory firms in proxy voting and corporate governance practices has increased and evaluating the regulatory oversight of the industry to date. The report, which was based on a review of academic research, interviews with proxy advisory firms, companies, investors and the SEC, was requested by Sen. Dean Heller (R-NV), the Chairman of the Subcommittee on Economic Policy for the Senate Banking Committee, demonstrating Senate interest in regulatory oversight of proxy advisory firms heading into 2017. The GAO last did a report on the influence of proxy advisory firms nearly a decade ago. The report's more interesting observations include:
- Proxy Advisory Firm Influence Has Increased. There is general agreement that, over the past 10 years and consistent with the increase in demand for proxy advisory firm services, the influence of proxy advisory firms over shareholder voting and corporate governance has increased. The increase in influence is related to greater share ownership by institutional investors, 91 percent of whom vote their shares, as opposed to individuals, who often do not vote.
- Extent of Influence May Vary by Investor. The report notes that there are mixed views as to the extent of proxy advisory firms' influence. It further states that based on its conversations with stakeholders and proxy solicitors, the size of the investor often corresponded to the amount of influence wielded by ISS. Specifically, smaller institutions without an in-house voting and research staff might be more influenced by proxy advisors. This is consistent with the conclusions of the Association's Center On Executive Compensation.
- Proxy Advisor Voting Policies. The report also examined how proxy advisory firms engage with stakeholders and companies regarding their voting policies. The report concludes that proxy advisors have taken steps to increase transparency and engagement with stakeholders. However, issuers told the GAO that they sometimes did not understand the rationale behind voting decisions.
Heading into 2017 with Republicans in control of all three branches of government, the report helps make the case for the Association-supported Corporate Governance Reform and Transparency Act which would subject proxy advisory firms to a strict, SEC-regulated oversight regime. As Republicans begin to pursue financial services reform in the 115th Congress, the Center will advocate that that proxy advisory firm regulation be part of the debate.