The Trump administration gets it right on limiting the power of proxy advisory firms such as ISS and Glass Lewis 

For decades, before doing so became popular, the first author was the author Questioning out loud Credibility of proxy consulting firms. And he is not alone. As Jamie Damon emphatically He warned in his latest letter to shareholders“It is increasingly clear that proxy advisors have undue influence… Many companies would argue that their information is often unbalanced, does not represent the full view, and is inaccurate.”

Likewise, Elon Musk criticized ISS and Glass Lewis as “corporate terrorists” after the two proxy advisers attempted to usurp the voting power legitimately owned by shareholders. Regardless of how you felt about the $1 trillion pay package that was up for shareholder approval at the time, it was noteworthy that shareholders overwhelmingly joined Musk in rejecting proxy advisors, demonstrating just how ineffective and problematic proxy advisors are. We would not use the term “terrorists,” nor would we call them “extortionists,” but we would go so far as to say that “some might say it resembles a blackmail scheme!”

Here are some of the main reasons I’ve identified and promoted over decades why proxy advisory firms are a problem:

1. Pervasive conflicts of interest: As written by the first author the Wall Street Journal In 2003“Some governance rating agencies appear more evasive than the companies they monitor,” noting that the ratings companies themselves try to provide advisory services to companies whose proposals they also evaluate, creating at least some appearance of pay-to-play. “This is similar to the bully protection schemes or auditor/consultant conflicts that governance experts criticize,” the first author wrote. “ISS sells advice directly to institutional investors on voting for their proxies while simultaneously selling advice to management on how to protect itself from those investors’ proxies.”
2. The outdated checklist approach reflects myths, not reality: proxy consulting firms are staffed by inexperienced staff Lack of experience in governance Or the experts, who prepare ill-informed checklists of very strict criteria, even though many of the criteria reflect myths rather than reality. Key enrollment dimensions such as limiting the tenure of the CEO/Director; Implement a formal retirement age, or enforce the separation of the Chairman/CEO It has little basis in empirical truth. If anything, some of the most notable corporate scandals of the past few decades, from Enron to WorldCom to Tycogets high marks on these bogus checklists – which reflects how useless they really are in determining good versus bad governance. Ironically, sometimes it is the acting advisors themselves who are guilty of misconduct; For example, An influential ISS analyst who recommended HP’s disastrous merger with Compaq was later found to have falsified his credentials.
3. Widespread Factual Errors: I have been vocal in repeatedly pointing out instances where the work of proxy advisory firms is so inaccurate that it contains fundamental factual errors – which can unfortunately have very significant consequences. For example, at the height of Disney’s heated proxy battle with Nelson Peltz, she called Find out how a major proxy advisory firm grossly miscalculated CEO Bob Iger’s stock performancemistakenly attributes the poor performance of his successor, Bob Chapek, to Iger. Similarly, ISS blamed Disney for not bringing a certain individual (Mason Morfit of ValueAct) to the board -Although this person has repeatedly denied, both publicly and privately, any interest in serving on the Board.

Proxy advisory firms haven’t always been bad. The original proxy advisors, such as Neil Minow and Bob Monks, who co-founded ISS, and Ralph Whitworth of Relational Investors, pioneered the concept of proxy advisory in the 1980s along with equity peer groups such as the Council of Institutional Investors, the United Shareholders Association, and the Center for Research on Investor Responsibility. They have been at the forefront of a virtuous and necessary movement in corporate governance, bringing accountability, transparency, and shareholder value to the forefront while exposing and ending corporate misconduct, nepotism, and wastefulness.

But over time, misconduct, nepotism and excess got the better of them, especially after the leading proxy advisory firms constantly traded between a rotating cast of conflicted foreign buyers and private equity firms. ISS alone traded hands no Less than eight times In the past three decades; One wonders how these proxy advisory firms are supposed to assess long-term shareholder value when their management seems like a bad mix between musical chairs and a hot potato.

For too long, these proxy advisors have been a blight on the corporate governance landscape, and the Trump administration deserves praise from across the political spectrum for working to address this critical challenge.

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