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For the Forum report noting shareholder communication issues addressed in the article summarized below, and for an archived webinar presenting sponsor and author summaries of the the study, see:


The Harvard Law School Forum on Corporate Governance and Financial Regulation, June 23, 2012 posting


Voting Decisions at US Mutual Funds: How Investors Really Use Proxy Advisers

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Saturday June 23, 2012 at 10:11 am

Editor’s Note: The following post comes to us from Mark Watson, partner at Tapestry Networks, and is based on the executive summary of a Tapestry report by Robyn Bew and Richard Fields. The full report is available here.


The balance of power among shareholders, management, and boards of directors has been a subject of debate for many years. One area of intense focus has been how institutional shareholders exercise their proxy votes, which Mary Schapiro, Chairman of the US Securities and Exchange Commission (SEC), described as “often the principal means for shareholders and public companies to communicate with one another, and for shareholders to weigh in on issues of importance to the corporation.” [1]

There is clear consensus on the importance and benefits of having institutions vote their shares in a responsible, well-informed way, but much less clarity on how the voting process works in practice. A particularly active area of the debate is over how investors use proxy advisers’ research, recommendations, and other services – alone or in conjunction with other internal and external sources – in making decisions about tens of thousands of unique agenda items each year. Convictions are strong on both sides, with those in one camp charging that institutional investors vote “in a lock-step manner” [2] with proxy firm recommendations, and their opponents insisting that proxy advisers’ research and recommendations are used “solely as a supplement to [most investors’] own evaluation of agenda items.” [3]

Between November 2011 and March 2012, on behalf of the IRRC Institute, Tapestry Networks undertook an extensive inquiry into US asset managers’ voting decision processes, as well as their views on the role proxy advisory firms play in those processes. In addition to reviewing major academic studies and current literature on the topic, we interviewed senior executives from 19 leading North American asset management firms and their affiliates, as well as academics, proxy advisory firms, proxy solicitors, and other stakeholders. In total, the investors we interviewed account for over $15.4 trillion in assets under management, or more than half of the assets under management in the United States. [4]

In addition to our interviews, Tapestry conducted a comprehensive survey of academic research and commentary on the relationship between proxy advisers and institutional investors. Studies show recommendations from Institutional Shareholder Services (ISS), the largest proxy adviser, are associated with significant shifts in support for ballot proposals, but causal relationships are more difficult to identify. However, “influence” is about more than voting outcomes: proxy firms’ perceived power may affect board and management decisions even outside the voting season. Studies of the first year of mandated advisory votes on executive compensation identified several effects of proxy firms’ recommendations on issuer behavior, including changes to the terms of pay plans.

Report highlights include:

»  Proxy firms’ role as data aggregators has become increasingly important to asset managers. Across the board, participants in our research said they value proxy firms’ ability to collect, organize, and present vast amounts of data, and they believe smaller asset managers are more reliant on those services. Nonetheless, participants emphasized that responsibility for voting outcomes lies with investors. They encouraged proxy advisers to fix problems such as data quality that contribute to negative perceptions of the proxy advisory industry and, by extension, those who use the industry’s services.

»  Proxy advisers play a role in asset managers’ formation of voting policy. Most commentary focuses upon voting outcomes, but our research shows that asset managers’ decision processes begin well in advance of vote execution, with a review and update of proxy voting policy. Research participants said changes in voting policy tend to be more evolutionary than revolutionary, but noted that proxy firms are one of the drivers of those changes. Depending on the asset manager, proxy firm policies may be adopted wholesale, used to identify issues and trends meriting closer attention, or incorporated as a source of input into voting guidelines, along with issuer dialogue and other sources.

»  Asset managers have a wide range of approaches to decision-making throughout the voting process. A key point of differentiation is the level of involvement of investment professionals, which tends to parallel the level of internal discussion and debate that takes place between the initial application of voting guidelines and final vote execution. Since evidence of such deliberation is often difficult to identify, outside observers may conclude that asset managers are unduly influenced by proxy advisers.

»  Regardless of how wide a net they cast for inputs into voting decisions, most asset managers find proxy firm data particularly useful in say on pay and international votes. Research participants’ decision practices in both of these areas vary (and especially in the case of say on pay, are still in flux). However, most asset managers said they make active use of proxy firm data to help in some way with voting decisions in these categories.

»  The demand for investor-issuer engagement will continue to grow. Participants believe the push for increased investor-issuer engagement will continue, but draw different conclusions about the resulting impact on proxy firms’ influence. Some predicted that demands for more frequent investor dialogue will exacerbate asset managers’ resource pressures, leading to greater reliance on proxy advisers. Others suggested that significant potential threats to the proxy firms’ business models may lie on the horizon.

The full report is available here


[1] Securities and Exchange Commission, “SEC Votes to Seek Public Comment on U.S. Proxy System,” news release, July 14, 2010.
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[2] Andrew Bonzani, vice president, assistant general counsel, and secretary, IBM, to Elizabeth Murphy, secretary of the US Securities and Exchange Commission, Comments on File Reference No. S7-14-10, Concept Release on the US Proxy System, Release No. 34-62495, October 15, 2010, 3.
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[3] Glenn Davis, senior research associate, Council of Institutional Investors, to Elizabeth Murphy, secretary of the US Securities and Exchange Commission, Re: File No. S7-14-10 (Concept Release on the U.S. Proxy System), October 14, 2010, 6.
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[4] Research participants included representatives from asset managers and their affiliates and subadvisors. Most research participants are based in the US, but we also spoke with some foreign-owned asset managers with significant holdings. Our calculation of assets under management is based on data from P&I/Towers Watson, The World’s 500 Largest Asset Managers, (New York: Towers Watson, 2010). It includes assets under management for US-based managers at which we spoke with an employee, affiliate, or subadvisor; we did not include the assets of foreign-owned entities’ US-based subadvisors or affiliates. See the Appendix for a list of research participants. This report also draws on conversations with board directors, executives, and other governance stakeholders conducted as part of Tapestry’s normal course of business.
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