While many investment managers these days profess an enthusiasm for putting their money into companies that hew to up-to-date precepts regarding environmental, social, and governance matters, these are not necessarily a priority for those whose money they invest. However, inertia sometimes results them implicitly making decisions that belie the wishes of their investors.
A new study put out by the Manhattan Institute and authored by Paul Rose, a law professor at the Ohio State University, examined the reliance of investment managers on proxy advisors following a rule recently issued by the Securities and Exchange Commission intended to rein in their influence. Rose found that investment advisers appear to be reluctant to change their behavior to comport with the law.
Since investment managers typically own shares in hundreds of different companies and must vote each proxy, this task is somewhat cumbersome, so they slough it off to a proxy advisory firm. Two firms—ISS and Glass-Lewis—effectively control this market, giving them an outsized impact over shareholder votes even though they own no shares.
The SEC began to examine the role of proxy advisors after business groups expressed concern that some investment managers completely turn over the task of proxy voting to these firms without taking steps to discern whether these firms are voting in the best interest of their clients, which they suggest may be a breach of fiduciary duty. If a proxy advisor voted the shares of an investment manager in a way that served to reduce the profits (and long-term value) of a company it owned, the people whose money is being managed would be worse off. Some refer to the practice of turning over proxies entirely to a third party as robo-voting.
Last year the SEC issued a rule requiring more disclosure from proxy advisors and provided additional guidance to investment managers intended to curtail the practice of allowing proxy advisors to vote the proxies for an investment manager without consulting them.
Rose’s study looked at how the SEC’s rules—which do not fully take effect until the 2022 proxy season—impacted robo-voting, and he found only a modest move away from the practice: Six percent fewer financial institutions appeared to robo-vote, and these institutions hold about 3.6 percent of the assets held by institutions in this population. The total number of robo-voted resolutions fell slightly as well.
The fact that relatively few investment management firms felt compelled to expeditiously adopt the guidance recommendations suggests that there is a degree of ambivalence on their part to such a change. This may be due partly to the fact that many investment institutions have come to embrace ESG investing and now market a number of fee-generating ESG portfolios, but it may simply result from the fact that paying little attention to proxy votes is cheap and the path of least resistance, even if it shortchanges the people whose money it is.
Even though the SEC’s rulemaking actions on proxy advisors occurred under the leadership of the prior administration, incoming SEC Chairman Gary Gensler should consider the study’s implications. Asking investment managers to be more vigilant about their fiduciary responsibilities when it comes to voting their proxies is not inconsistent with the SEC’s ongoing efforts with regard to ESG investing.
The SEC is now reacting to pressure from large asset managers and groups that represent large numbers of investment managers to do more to standardize ESG disclosures so that it is easier for investors to discern that firms offering such products are indeed putting their savings in worthy companies.
However, it is not clear that reasonable people—even those who are allied in a particular cause—will be able to come up with a rubric that clearly identifies worthy companies: The nature of the issues in question change over time and each industry may need its own criteria. This reality is the basis for the SEC’s current principles-based disclosure regime.
People who want to put their money in ESG investments should be allowed—even encouraged—to do so, and the SEC should strive to make it easy to do so, but it should not deceive investors into believing that there is an easy method to discern the relative effectiveness of various funds—or that there ever will be.
Similarly, investors who do not choose to put their money into ESG funds should not have their ESG issues implicitly made a priority by the actions of proxy advisors.