Particularly, the GAO said, the business model of the dominant proxy advisory firm, Institutional Shareholder Services (ISS), has been the most commonly cited potential conflict. ISS advises institutional investors how to vote proxies and provides consulting services to corporations seeking to improve their corporate governance, so critics say corporations could feel obligated to retain ISS’s consulting services in order to obtain favorable vote recommendations.
ISS officials responded to these concerns by saying they have disclosed and taken steps to mitigate this potential conflict both on their Web site and with their policy of advising clients of relevant business practices in all proxy vote analyses. The two ISS services employ separate staff who work in separate buildings, the GAO report said.
While new proxy advisory firms have entered the market, some industry analysts say ISS’s long-standing position is a barrier to competition. Competitors have attempted to differentiate themselves from ISS by providing only proxy advisory services and not corporate consulting services. It is too soon to tell what their ultimate effect on enhancing competition will be, the GAO said.
GAO also found that, among the 31 institutional investors it spoke with, large institutions reportedly rely less on the research and recommendations offered by proxy advisory firms than small institutions. Large institutional investors said their reliance on proxy advisory firms is limited in part because they have in-house staff to assess proxy vote issues. They said they only use the research and recommendations offered by proxy advisory firms to supplement such research.
On the other hand, small institutional investors have limited resources to conduct their own research and tend to rely more heavily on the research and recommendations offered by proxy advisory firms. This finding suggests proxy advisory firms’ overall influence on proxy voting results is limited.
The GAO did its research because institutional investors such as mutual funds and pension funds cast the majority of proxy votes due to their large stock holdings, and in recent years, concerns have been raised about a group of about five firms that provide research and recommendations on proxy votes to their institutional investor clients. The GAO reviewed SEC examinations of proxy advisory firms, spoke with industry professionals, and conducted structured interviews with 31 randomly selected institutional investors for its research.
The complete GAO report is here .
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