All Rights Reserved. But while their clients want to maximize returns, the objectives of proxy advisory firms may not be completely aligned with theirs. These are encouraging measures for mitigating the conflict concerns; however, they do not solve inherent conflicts of interest embedded in some advisory firms’ business model. Given the SEC’s ongoing efforts to ensure transparency in the markets and to protect the interests of retail investors through Regulation Best Interest and other requirements, it is possible that this difference of opinion may prove problematic. Certain investors—generally the largest ones—have sufficient personnel and resources to review the analysis and recommendations of their proxy advisors. The extent to which these firms are effectively signing over their proxy recommendations has led some to question whether this might constitute a breach of fiduciary duty. Abstract The current market for proxy advice arises out of an agency problem, but not the one usually assumed. Because given this competitor’s recommendations, investors may make a more informed guess about the incumbent’s truthfulness. XX.) ISS argues that proxy advisory work constitutes “investment advice” under the Advisors Act, which would make the company a fiduciary and subsequently a “a disinterested fiduciary.” This description diverges from Glass Lewis’s view of itself in its letter to the Senate Banking Committee, which declares that it neither dispenses “investment advice” nor serves as a fiduciary. Their franchises are built on credibility with investors. However, companies are increasingly seeing proposals from shareholders that call on the company to take action on broader public policy proposals, both major and minor. Dr Tao Li is an Assistant Professor of Finance at Warwick Business School. Tao’s work has been presented at conferences organised by the European Finance Association, the European Corporate Governance Institute, the European Commission and Columbia Law School. The sheer number of proxy items makes it difficult for institutional investors to perform this activity themselves. A proxy firm (also a proxy advisor, proxy adviser, proxy voting agency, vote service provider or shareholder voting research provider) provides services to shareholders (in most cases an institutional investor of some type) to vote their shares at shareholder meetings of, usually, quoted companies. In the adopting release for the amendments, the SEC refers to proxy advisory firms offering services to public companies regarding corporate governance and compensation policies and practices that are often material to the recommendations that the advisory firms make to their advisory … Founded in 1985, ISS is based in Rockville, Md., and maintains offices in 13 countries. Proxy advisors are important because institutional investors—pensions, college endowments, and investment management companies—dominate shareholder voting. These include: (1) perceived conflicts when proxy advisory firms or their parent companies provide other services to clients; (2) potential conflicts when officers or directors of proxy advisors serving on public company boards that have proposals on which the proxy advisory firms are making voting recommendations; (3) potential conflicts related to making recommendations on proposals sponsored by institutional investor clients. His recent work studies conflicts of interest and the role of competition in the proxy advisory industry, as well as incentives of hedge funds. It would potentially react to market pressure, and reduce its biased recommendations if any. In 2015, the Obama Administration called for more stringent rules overseeing investment managers. Further research is needed to control for these confounding effects.After nearly four years since the publication of its concept release, the SEC in June 2014 issued long-awaited interpretive guidance directing proxy advisory firms to disclose to institutional clients ‘any significant relationship’ with issuers or shareholder proponents. The paper concludes by recommending the modest application of traditional disclosure tools to the market for proxy advice. [12] The Code was developed with an independent chairman, Dr Dirk Zetsche, Propter Homines Chair for Banking and Securities law at the Institute for Financial Services of the University of Liechtenstein and Director of the Center for Business & Corporate Law at Heinrich Heine University in Duesseldorf/Germany. Investment fund managers have relatively few economic incentives to invest effort on corporate governance and so they tend to organize around picking the best stocks and trading those stocks at the optimal time. There is evidence these failures arise systemically as a logical consequence of the conflicts of interest of the agents that make up the market. This came after the European Securities and Markets Authority’s (ESMA’s) 2013 recommendation that the proxy advisory industry develop an EU Code of Conduct that focuses on “identifying, disclosing and managing conflicts of interest; and fostering transparency to ensure the accuracy and reliability of the advice”. One week after its meeting, Axcelis received a marketing call from an ISS representative.