Another wolf at the door: the proxy advisory firm

Proxy advisory firms – which include Institutional Shareholder Services (ISS) and Glass Lewis – communicate with corporations and shareholders on matters that require shareholder votes. They review the disclosure that companies issue in advance of shareholder meetings and provide recommendations on how shareholders should vote. They also have assumed a broader role in regulation, establishing metrics for evaluating companies’ governance practices, including board composition and ESG (environmental, social and governance) practices. On matters of concern for securities regulators, such as women on boards and climate change disclosure, they are an extra set of hands in the regulatory effort.

Proxy advisers can be valuable because they fill an information gap: institutional investors contract with these firms to carry out comprehensive reviews of voting proposals that the investors themselves have neither the time nor the resources to undertake. Over 1,700 mutual and pension funds rely on ISS alone, managing over US$26-trillion worldwide, according to the firm itself. Glass Lewis reports that it represents over 1,300 clients that manage a collective US$35-trillion in assets. In short, many institutional investors, including pension funds and mutual funds, review and perhaps follow proxy advisers’ recommendations when voting their shares.

Proxy advisers also influence boards’ decision making. More than 70 per cent of directors and executive officers have reported that their compensation decisions were influenced by guidelines published by ISS and Glass Lewis.

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