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How Investors Really Use Proxy Advisors

06/20/2012 - FTI Consulting, Strategic Communications

In June 2012 an insightful report was issued, “Voting Decision at US Mutual Funds: How Investors Really Use Proxy Advisers” that investigates the influence proxy advisers have over institutional proxy decisions. The research project was commissioned by the IRRC Institute (The Investor Responsibility Research Center Institute) and performed by Tapestry Networks, Inc.

Key findings from the study:

  • While there is a high correlation between proxy adviser recommendations and shareholder voting, it is difficult to measure the degree to which proxy advisers shift investor votes. What is widely held as good corporate governance has been internalized by shareholders. As one asset manager noted, “so many people overestimate the importance of ISS. Just because we reached the same conclusion, it doesn’t mean we didn’t do our own thinking.
  • Because of the enormous number of proxies that must be voted, proxy advisers have become increasingly valuable to institutional investors as aggregators and packagers of information. And they are influential in shaping voting guidelines in advance of the proxy season.
  • Most asset managers find proxy adviser data especially useful for say-on-pay and international voting.
  • Institutions are mixed as to whether portfolio managers or the corporate governance team vote proxies, and which party has the final authority. At over half the asset managers that participated in the survey, portfolio managers were moderately to actively involved in discussions about proxy voting decisions.
  • Participants in the study indicated that direct discussions with companies are more influential than the proxy advisers.

It seems apparent that institutions have internalized a lot of the governance policies espoused by activists and proxy advisers, so it is important not to overestimate causality of adviser recommendations as opposed to when shareholder votes reflect the views of investors who happen to agree with the proxy advisers.

The research reinforces our long-standing view that proxy season is not a discreet season but rather a continuum that encompasses annual meetings and the periods in-between. Because corporate governance is evolving over time and being seized upon by parties having particular agendas, a company’s ongoing engagement with its shareholders is critical to understanding their thinking and being able to influence their corporate governance policies and resulting voting behavior. This helps to ensure that the dialogue regarding compensation, board structure and responsibilities, political activities and company policies is being managed by the company rather than hijacked by activists or self-interested parties.

The full research report can be accessed by clicking here.

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