The Shareholder ForumTM

Electronic Participation in Shareholder Meetings

Forum Home Page [see Broadridge note below]

"E-Meetings" Home Page

"E-Meetings" Program Reference


The following corporate governance experts have presented comments on the article below for distribution to Forum participants, each with links to their blog postings.

Andrew M. Clearfield, President of Investment Initiatives, Chair of the International Corporate Governance Network ("ICGN") Committee for Securities Lending and former Managing Director of TIAA-CREF, October 26, 2010:

Larry Ribstein, on his blog-site "Truth on the Market" has already flagged this article, and strongly supported it. I replied on the thread that the analogy was only partly true: true because investors had chosen to outsource (and in the case of credit ratings, refused to pay for) what would otherwise have been their responsibility, and false because what went wrong with credit ratings was that the rating standards were too low, not that they were (as opponents of proxy advisors claim) unrealistically high. Is anyone going to argue that activist institutions have 'bought' ISS by providing all their income, the way that issuers had clearly corrupted S&P and Moody's by providing all of theirs? I think you would have a hard time demonstrating that this could conceivably be the case.

If you and the others on the Forum are interested, Larry's blog, and my response, are available at

I think that these and similar pieces are potentially persuasive, especially in the present political climate, and need to be responded to.

Nell Minow, Chair of The Corporate Library, co-author of Corporate Governance, and former President and co-founder of Institutional Investor Services ("ISS"), October 27, 2010:

This really is a despicably shoddy piece and appears to have been drafted by the PR or law firms working with the BRT and Chamber, statistically illiterate and without any opportunity to comment from the producers or users of proxy advise or even any review of the work product. He did a follow-up piece as well, just as poor. I have posted a short comment with a link to my SEC submission (  and I urge those of you who are interested in this issue to respond as well.

For the author's subsequent article and a final response that Ms. Minow asked to present for consideration by Forum participants, see:


CNBC, October 26, 2010 article



Why You Should Be Worried About Proxy Advisory Firms

Published: Tuesday, 26 Oct 2010 | 8:53 AM ET 

By: John Carney
Senior Editor,

The market for proxy advisors has grown significantly in the past decade, enriching those who run proxy advisory firms.

Jeffrey Coolidge | Iconica | Getty Images

The growing importance of proxy advisory firms has prompted market participants, journalists and scholars to examine ways in which their influence could be problematic. The usual litany of complaints includes conflicts of interest, transparency, methodology, and responsiveness to investor interests.

But little attention, if any, has been paid to the source of demand for proxy advisors. Some of those who have looked into the proxy advisory business think the answer is obvious: institutional investors are the biggest users of proxy advisors, and the role of institutional investors in the markets has been growing rapidly. The larger the share of equities held by institutions, the larger the role for proxy advisors.

Of course, this only moves the question on step backward: why are institutional investors increasingly purchasing proxy advisory advice?

The reliance by institutions on advisors is a bit surprising. Sophisticated mutual fund managers and pension fund managers might be expected to be in the best positions possible to make their own determinations about the wisdom of voting for board candidates or executive pay recommendations. Given the well-documented flaws in the proxy advisory business, why aren’t institutions internalizing this process?

Part of the answer may be complexity. Corporate proxies are becoming increasingly complex, as investors are asked to vote on more questions and those questions themselves are increasingly complex. Some sources of the new questions and new complexity:

  • hedge fund activism—largely enabled by ‘shareholder friendly’ regulations—has increased the number of proxy contests, while raising the possibility that the interests of the activists may depart from long-term shareholders;
  • regulatory increases in shareholder power to vote on corporate governance matters has enhanced the importance of proxies while introducing complex questions of optimal governance that are highly contested even among the best informed experts in the field; and
  • the shift to require that directors receive a majority of the votes even in uncontested elections,—which is likely the result of enhanced shareholder say in governance matters—has allowed for a powerful ‘none of the above’ strategy to be employed by opponents of management.

In addition, proxy questions that are not yet mandatory but that have been under consideration may drive demand in anticipation of the questions. These include the ability to cast a vote on executive pay and further proxy access rules.

It may be that as the questions become more numerous and complex, the costs of internally evaluating them—which include opportunity costs for talent diversion as well as error costs—outweigh the agency costs of using proxy advisors. Or, at least, this could be the perceived balance of costs that—whether accurate or not—would increase demand for proxy advisors.

To put it differently, although the rise of proxy advisory firms appears at first glance to be a consequence of a market phenomenon, this appearance is probably deceptive. Securities regulations that have increased the complexity of proxy questions are very likely increasing the demand for proxy advisors. Which is to say that the demand for proxy advise is not driven by some internal market process but by regulatory intervention in the markets.

This consequence is wholly unintended. As far as I’ve been able to discover, no one has advocated for increased proxy access or say on pay provisions on the grounds that they would increase the demand for proxy advisory services. Indeed, I doubt many realized that this would result from changes to securities regulations that were intended to be ‘shareholder friendly.’

In fact, there’s something a bit ironic about this result. Reforms to securities regulations that were ostensibly intended to empower shareholders or further ‘shareholder democracy’ have instead resulted in increasing domination of proxy questions by a small clique of advisors. That those advisers have often been advocates of these reforms should at least raise an eyebrow about how unintended this consequence really was.

Another source of demand for proxy advice has been the regulation put in place by the SEC in 2003 that required mutual funds to adopt written policies and procedures to ensure that securities were being voted in the best interests of clients. Of course, the easiest way for mutual fund managers to protect themselves against accusations that they have violated their duty is to abandon this field, giving it over to third-party advisory firms. It’s harder for an investor to challenge the proxy voting decisions of a mutual fund manager when those decisions are made by a well-respected proxy advisory firm.

Note that there’s an irony—or, perhaps, perversity—to the dynamic here. A regulation that appears, on its face, to require mutual fund managers to carefully consider whether they are voting on proxy questions in the best interests of their clients, instead has resulted in them outsourcing this decision to firms who are even further removed from client influence and whose interests may conflict with clients. (In passing, let’s note that the largest proxy advisory firms are supporters of these mutual fund rules.)

The rise of proxy advisory firms, in other words, appears to largely be the unintended and unanticipated consequence of regulations aimed at investor protection. This suggests, at the very least, that we should be wary that the proxy advisor’s rise may be accompanied by unintended and unanticipated costs.

In fact, there are frightening parallels between the rise of the proxy advisors and the role played by credit ratings agencies. Like the proxy firms, the ratings agencies saw the demand for their services grow largely due to demand driven by regulation. Because the demand was not driven by genuine market demand for analysis, ratings agencies were able to profit while providing poor credit analysis. Similarly, proxy firms have business-lines increasingly locked-in by regulation.

We should at least worry that their advice might fail just like the advice of the credit ratings agencies failed.


© 2010 CNBC, Inc.




This Forum program is open, free of charge, to anyone concerned with investor interests in the development of standards for conducting shareholder meetings with electronic participation. As stated in the posted Conditions of Participation, the Forum's purpose is to provide decision-makers with access to information and a free exchange of views on the issues presented in the program's Forum Summary. Each participant is expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

The organization of this Forum program was encouraged by Walden Asset Management, and is proceeding with the invited leadership support of Broadridge Financial Solutions, Inc. and Intel Corporation to address issues relevant to broad public interests in marketplace practices, rather than investor decisions relating to only a single company. The Forum may therefore invite program support of several companies that can provide both expertise and examples of leadership relating to the issues being addressed.

Inquiries about this Forum program and requests to be included in its distribution list may be addressed to

The information provided to Forum participants is intended for their private reference, and permission has not been granted for the republishing of any copyrighted material. The material presented on this web site is the responsibility of Gary Lutin, as chairman of the Shareholder Forum.

Shareholder Forum™ is a trademark owned by The Shareholder Forum, Inc., for the programs conducted since 1999 to support investor access to decision-making information. It should be noted that we have no responsibility for the services that Broadridge Financial Solutions, Inc., introduced for review in the Forum's 2010 "E-Meetings" program and has since been offering with the “Shareholder Forum” name, and we have asked Broadridge to use a different name that does not suggest our support or endorsement.