May 02, 2014
In the ongoing debate over whether all investors should have to vote on every matter on every proxy, a new law review article demonstrates why greater regulatory oversight and transparency is needed to see how proxy advisors arrived at their votes. The article, Shareholder Voting in an Age of Intermediary Capital, by Vanderbilt Professors Paul Edelman and Randall Thomas and Georgetown Law School Professor Robert Thompson argues that even as shareholders today are institutional intermediaries for the owners of capital (as opposed to directly owning the shares), shareholder voting is beneficial both in high dollar situations (such as a hedge fund takeover) as well as certain low-dollar situations (say on pay votes but not corporate social responsibility votes). However, the authors note that without making say on pay votes mandatory, investors would not vote. It also states that investors "want to spend the least money possible to cast their ballots in an informed, value maximizing way so as to comply with their legally mandated duties. Third party voting advisors play a valuable role by reducing voting costs significantly." However, the article also notes that "it is important that the signals coming out of the proxy advisors be unbiased. If they are not, and the third party voting advisor recommends value decreasing action, then their institutional clients are unlikely to conduct sufficient research to detect the difference." Unfortunately, the article does not explore the issue further, noting simply that "possible regulatory responses remain in play." The fact that the article relies on the recommendations of proxy advisory firms to justify the impact of say on pay votes, as well as the conflicts of interest that are still inherent in the structures of both ISS and Glass Lewis, underscores why the SEC should revisit its oversight of the proxy advisory firm industry in the near term.