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Do You Know Who’s Voting Your Proxies?
By: Simon Zais, Egan-Jones
The way a company is managed is important and causal to its outcomes. The owners of a company should get to decide how that company is run. If an asset owner has a company in the portfolio, they should want better outcomes for that company. Starting from these three truisms leads to the conclusion that asset owners need to be invested in the proxy process.
This is an excerpt from NCPERS Summer 2024 issue of PERSist.The way a company is managed is important and causal to its outcomes. The owners of a company should get to decide how that company is run. If an asset owner has a company in the portfolio, they should want better outcomes for that company. Starting from these three truisms leads to the conclusion that asset owners need to be invested in the proxy process.
There are only three ways proxies get voted, each fraught with operational peril and ripe for exploitation. Executed properly, the proxy lever for exerting influence on corporate governance is a beautiful thing: a virtuous combination of values alignment and shareholder democracy. Unfortunately for large asset owners and their beneficiaries, there can exist real misalignment and conflict between various stakeholders.
The most obvious way a proxy gets voted is directly by the asset owner. Asset owners looking to keep third-party bulls out of their corporate china shops often choose this option. Far from being a panacean remedy however, the costs associated with this solution can be significant. Even beyond erection of the associated operational and compliance scaffolding, for large institutions with diversified equity portfolios, the associated personnel demand can be staggering. These are valuable man hours that could be spent developing investment theses, performing manager diligence, or even golfing. Not to say corporate governance isn't valuable—it obviously is—but it battles in the hyper-competitive arena for allocator attention.
“So, I'll let my managers vote their portfolio proxies on my behalf,” says this allocator after reviewing her organizational capabilities against the aforementioned structural hurdles to vote proxies herself. Whether operating from an SMA or pooled vehicle, delegation of this authority is an invitation to conflict and risk, both regulatory and headline.
These managers often have their own priorities when it comes to the way portfolio companies should be run. The most visible and politicized example is climate and emissions prioritization. Via the Net Zero Asset Managers initiative, over 300 asset managers collectively managing over $57T in assets have committed themselves to both pressure their asset owner clients into decarbonization goals, and develop “escalating” stewardship and engagement strategies against portfolio companies. Are these directives in the best interests of the companies, shareholders, funds, or beneficiaries? Do they drive long term returns? Or are these conflicted managers instead interpolating public policy into boardrooms?
“Luckily I can outsource to a proxy advisor.” This manager will finally say, with a sigh of relief. “Surely they will consider only the best interests of my beneficiaries.” Unfortunately, stemming from the market concentration and centrality, the agency problems highlighted with asset managers can actually be amplified with proxy advisors if asset owners do not carefully choose and closely monitor these partnerships.
Returning again for illustrative simplicity to the climate example, even custom or hybrid policies may not be enough to guarantee alignment. Advisors' slippery contract language and deep climate religiosity can introduce uncertainty in a best-case scenario, or backdoored activism at worst. In fact, two of the top three proxy advisors have dedicated to using their size and scope to make the world greener through their boardroom influence.
As asked above, how much daylight is appropriate to exist between the goals, objectives, and values of a plan and its beneficiaries, and the political activism of the proxy advisors paid to exercise proxy voting authority?
Even more troubling, however, is the practice by some proxy advisors of providing corporate consulting to the very companies in which they will be voting shares. This is an extreme conflict that has been called out repeatedly by regulators, academics, and industry participants.xx There is no information firewall or control set that empowers these interlocking and supplemental activities to safely live within one organization. The demand that service providers provide unconflicted advice is supremely reasonable and in the highly visible and scrutinized world of corporate governance, should be table stakes.
The way a company is managed is important and causal to its outcomes. The owners of a company should get to decide how that company is run. If an asset owner has a company in the portfolio, they should want better outcomes for that company. Starting from these three truisms leads to the conclusion that asset owners need to be invested in the proxy process. Whether owning the process outright or outsourcing certain activities, identifying and mitigating conflicts, and managing tradeoffs is the jumping-off point to doing right by beneficiaries and stakeholders. More and more attention is being paid to corporate governance. It's time for asset owners to really know, who's voting your proxies?
Bio: As a Senior Manager at Egan-Jones Proxy, Simon Zais works with asset owners, asset managers, and wealth managers across the proxy landscape to ensure alignment between values and effective corporate governance. He lives in Connecticut with his wife, kids, and dog, who are all very tired of hearing about proxy voting.
Endnotes:
1 Signatories – The Net Zero Asset Managers initiative
2 The Troubling Case of Proxy Advisors
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