The good news is that the administration is reported to be working on an executive order to restrict proxy advisory firms.  The bad news is that the administration is reported to be working on an executive order to restrict proxy advisory firms. 

If the preceding paragraph seems contradictory, read on.

I am no fan of proxy advisory firms.  In my many years in-house, I dealt with ISS and, to a lesser extent, Glass Lewis far too much for my liking.  In many instances, I found their analyses and recommendations to be ill-conceived or worse, and getting them to correct even manifest errors often took far too much effort.  Even when I understood where they were coming from, their reports were often badly written and/or gratuitously snide.   In other words, in my view, the proxy advisory firms definitely need to be reined in and regulated.

So why do I oppose the anticipated government actions?  Here are some reasons:

• Executive orders are not models of subtlety or nuance, and given the complexities of the proxy process (more on that below), they are likely to have any number of unintended consequences.  (Can you say “ready- fire-aim”?)

• One such consequence may be the demise of the proxy advisory business.  Some may view that as a good thing, but one reason that the proxy advisory business continues to exist is that there is a market for it; many investors need it.  Simply stated, investors do not have the time to review proxy statements at all, much less review them carefully.  (For example, I once asked one of my company’s major investors how much time it spent reviewing our proxy statement.  The response was more or less as follows: “You are one of our major investments, so we devote more time to you than most companies – around 15 minutes.”)  When investors, even those that take voting obligations very seriously (though not all do), have to review hundreds of proxy statements in a very short time period, it’s no wonder that they want to lean on a third party, at least to some extent.  So if the proxy advisory industry is put down, it seems possible if not probable that some institutions won’t vote at all.  And if that happens, the difficulty that some companies experience getting a quorum for their meetings may increase geometrically or worse.  Or they may resort to just voting no, or voting by bot; the latter is already happening, and it’s not a pretty sight.

• As noted above, a draconian approach to dealing with proxy advisors will not address the complexities and challenges that are built into our proxy system.  The time pressures also noted above are only part of the problem.  In my experience, very few proxy statements are easy to read; they are often incredibly dense (and sometimes written that way on purpose), and even those that are user-friendly can be inordinately complex.  Trying to determine how to vote on say-on-pay when a company takes 20 pages of fine print to explain its compensation program isn’t easy.  So it’s not surprising that proxy advisors come up with silly solutions. 

While the SEC hasn’t been very successful in regulating proxy advisory firms in the past – perhaps because of a pro-investor bias from time to time – I still believe that it has the expertise necessary to address this challenge.  SEC Chair Atkins has said that he is determined to engage in regulatory reform; why not make this one of the areas to be reformed?  At the same time, all industry players need to engage in serious thinking about how to address the proxy process. Companies need to understand that their owners need something like the proxy advisory industry to help, especially during the “silly season.”  Investors need to understand the frustrations that companies face when dealing with proxy advisors.  And the advisors themselves need to admit that they are, in fact, very influential and that they need to be far more transparent, candid about how they develop their recommendations, and more responsive to criticism.  Simply saying, as ISS has said since forever, that “we are only following our client’s views,” is not helpful.

As our Executive Orderer-in-Chief often says, “We’ll see what happens.”  But if it were up to me, I’d be careful what I wish for.