Along with the growing trend of shareholder activism, the influence of proxy advisory firms on institutional shareholder votes has increased tremendously. Even though these firms are focused on making recommendations to institutional shareholders, their impact on retail shareholders can be detrimental to your bottom line.
There are two major proxy advisory groups in the U.S.: Institutional Shareholder Services (ISS) and Glass Lewis. Proxy advisors consult institutional shareholders on how to vote on a range of proposals in annual meetings, from corporate director elections to support of various environmental, social and governance proposals. And currently, ISS and Glass Lewis hold a duopoly in the market, which greatly limits the competition.
The largest clients of these advisory firms are shareholder activist groups, which are politically and ideologically motivated. The firms are paid a large sum of money by activists, incentivizing advisors to favor proposals backed, or even written, by their clients. To these firms, the shareholder’s return on investment and success of the company is second to furthering their client’s political or ideological beliefs.
In addition, researchers found that recommendations from ISS overall negatively impacted shareholder value. Both retail and institutional investors would have been better off voting in opposition of the firm’s recommendations. As shocking as that may be, it seems to confirm the notion that the social and political motivation behind these proxy advisory firms is valued higher than the return for shareholders — and the company’s overall success.
The bias of the proxy advisors’ recommendations comes with a cost. Retail shareholders only own 30% of a company’s total shares. Since ISS and Glass Lewis advise the other 70% of investors, it is critical that retail shareholders vote their proxy in support of proposals that will increase the value of their shares.
Advisory firms are not continually increasing shareholder value and therefore, it appears as if they exist solely to further agendas. Retail shareholders should fight to see just how these advisory firms are impacting their portfolios year after year.