Proxy Advisory Error Rates Show Little Improvement

A key point in the proxy advisory reform debate is the number of impactful errors included in proxy voting recommendation reports. While companies have long raised concerns about errors and the inability to get them fixed, proxy advisory firms have held their cards close to the chest about error rates, claiming most reported errors are really just differences of opinion. 

In a report published in December 2021, the American Council for Capital Formation (ACCF, an economic policy think tank) found at least 50 instances where companies disputed the data or analysis used by proxy advisors to generate a vote recommendation - an increase from 42 filings in 2020. While a disputed data point does not necessarily imply a material error, it represents an element of concern strong enough that a company was willing to file a supplemental statement contesting the given assertion or data point in the proxy report.

Due to a variety of factors including allocation of resources and lack of time between the report’s publication and the shareholder meeting, many companies do not engage proxy advisors on errors. Therefore, the report notes that supplemental filings may well represent the “tip of the iceberg” and undercount the overall instances of errors or other methodological flaws contained in proxy advisory firm recommendations.

The question of error rates was raised in comments this year on the SEC’s proposed amendment to nullify proxy advisor reforms. The Society of Corporate Governance noted in its comment letter its “December 2019 Society member survey, in which 42 percent of respondents answered affirmatively when asked if they were “aware of any factual errors, omissions of material facts, or errors in analysis in the last three years.”

It remains to be seen if ISS’s ballyhooed data verification process will materially improve the error rate or provide companies with a meaningful and functional engagement tool.