The proxy voting system has taken on increased importance amid growing interest in environmental, social and governance (ESG) issues and how investors vote on related shareholder proposals. Institutional Shareholder Services (SSI) And Lewis Glass, in particular, provide essential guidance, and shareholders who wish to vote proxies depend on them to execute their proxy votes in a thoughtful and transparent manner. But with just two players dominating the space, are investors really getting the diversity of perspectives they need to make informed proxy votes?
This is where a new database, OxProxcomes in. Founded by Ian Robertson, CFA, who co-authored this article, OxProx is a social enterprise spin-off from the University of Oxford and is the first publicly available service that collects, reviews and compares voting records by proxy among asset owners and asset managers worldwide.
The importance of the ISS and Glass Lewis
Certainly, by offering research, advice and record keeping, ISS and Glass Lewis are essential pillars of the proxy voting system. Investors with thousands of stocks in their portfolio can hardly track every proxy vote. They would be better off instituting a policy to guide their vote while paying extra attention to specific issues that match their expertise and interests.
Are two platforms enough?
Regulators, academics and investors have recognized that the pre-eminence of ISS and Glass Lewis may lead to a dearth of alternative views on how shareholders should vote, and this may force investors not to follow the recommendation. of the proxy advisory service to which they subscribe.
Pension plans and other large investors have the ability to mitigate this duopoly problem by subscribing to either ISS and Glass Lewis and incorporating their advice as an input rather than a default vote. They can then add their own research and perspectives on certain proxy votes beyond what ISS and Glass Lewis provide or what would be possible through a standard voting policy approach. However, due to time and cost constraints, many small and medium enterprises have no choice in most cases but to rely on the two dominant players.
A helpful step
With OxProxThrough the publicly available and searchable database of global proxy voting records, investors and analysts can compare how investors voted their proxies and what their voting justifications were if and when they were disclosed. When does an investor’s proxy vote comply with ISS and Glass Lewis guidelines? When is it different? Does an investor always support management or shareholder proposals? OxProx makes this data available and findable.
Vote disclosure requirements and practices are governed at the national level, so as a global database, OxProx facilitates more robust comparisons.
Who benefits from proxy data transparency?
ShareAction UK, as you sow in the United States, and SHARE in Canada, among other stakeholder and shareholder advocacy groups, all do significant work on ESG issues. But these organizations don’t view proxy voting through the prism of shareholders or financial materiality. In other words, they are not overly influenced by whether shareholder returns will be materially affected by certain ESG decisions. Rather, they engage with companies and industries on greenhouse gas emissions and other ESG issues to advocate for changes that will benefit all stakeholders and society as a whole, even whether they can reduce shareholder profits.
Data from OxProx can help inform these organizations on how to approach and hold companies and investors accountable when their political vote goes against the long-term interests of shareholders and stakeholders. The contested elections of directors to Exxon Mobil in 2021 is a good example. Skeptical of the company’s carbon transition strategy, investment firm Engine No. 1 ran a successful campaign for board seats.
The investor and the adviser
The proxy voting system is a crucial channel for public companies and their investors, with ISS and Glass Lewis leading the way. But the transparency and accountability challenges are real, and OxProx can help fill those gaps by providing accurate and timely data on how different investors voted.
As ESG factors become an increasingly integral part of investment decisions, platforms like OxProx can help promote responsible investing and drive positive changes in company results.
For many years, reconciling ESG issues with investment performance posed a challenge to fiduciaries who equated ESG considerations with portfolio stock selection. All other things being equal, a screened portfolio is less diversified. Absent market misvaluation of the selected investments, such a portfolio will produce lower risk-adjusted returns. Incorporating material ESG issues into investment analysis and stock selection is now standard practice for active managers and is considered part of their fiduciary duty. For some managers, engaging with selected companies on ESG issues can provide additional analytical insights and encourage recipient companies to seek better outcomes for shareholders and stakeholders.
Stakeholders and advocacy groups can in turn push investment managers to seek better ESG outcomes. While these may not increase financial returns, they may not harm them either.
Indeed, the transparency provided by OxProx can persuade investors to improve their proxy voting on ESG issues – to the point where there are no diminished financial returns and that ESG proposals with a net present value (NPV) positive enjoy greater support.
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All posts are the opinion of the author(s). As such, they should not be construed as investment advice, and the opinions expressed do not necessarily reflect the views of the CFA Institute or the author’s employer.
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